Introduction

In the summer of 2012, America was still in recovery from the worst economic recession since the Great Depression. Congress and President Obama were focused on the impending election, a period that usually involves little in the way of controversial policymaking or change. But as the year drew to a close, something strange began happening with a U.S. Department of Education loan program known as Parent PLUS, under which parents borrow money from the government to finance their children’s education (See Box 1: What Are Parent PLUS Loans?).

It started with whisperings among financial aid administrators that more parents were being rejected for the loan than usual. It seemed that at some point after students arrived for fall semester 2011, the Education Department began tightening the credit check criteria for PLUS loans. Rejections continued to swell through the spring and summer semesters. By the following autumn, some colleges—particularly those that enroll many low-income minority students—were in significant financial distress. Without access to PLUS loans, parents could not pay tuition bills.

Urgent calls were made to the Education Department, Congress, and the White House. It turns out that the Department had discovered an error in the way the credit check had been implemented. This error was discovered after the federal loan program transitioned to full direct lending in July 2010. Before then, the federal student loan program made loans under two different programs: the Direct Loan program, where loans are issued directly through the Education Department, and the Federal Family Education Loan (FFEL) program, where loans were issued by private lenders and backed by the government. For all intents and purposes, the terms and conditions of the loans were the same. But the Department discovered a discrepancy between how the FFEL program implemented the credit check versus how it was done under Direct Loans. The Department had been, by mistake, making loans to parents with a history of accounts charged off to bad debt and accounts in collections.¹ Therefore, the Department had no choice but to reconcile the two credit checks.

The Department thought the impact would be minor for parents and colleges. It was wrong. The change pulled the curtain back on a group of colleges and universities that were heavily reliant on revenue from federal loans made to low-income families of color with bad credit.

Black parents, who were deeply impacted by the subprime mortgage crisis and higher unemployment rates compared to other groups, were particularly hard hit. At some historically Black colleges and universities (HBCUs), rejections were so significant that students could no longer enroll, leaving colleges scrambling to fill budgetary holes. Carlton Brown, then president of Clark Atlanta University, an HBCU, remarked in an Education Department hearing, “the drastic decision to change the credit regulations controlling the Parent PLUS loans without effective evaluation of its impact nationally and specifically on HBCUs and without prior communication and input, has resulted in a tornadic effect through the denials of 400,000 Parent PLUS applications, 28,000 of those for students at HBCUs.”²

Reeling from such a dramatic loss in revenue, HBCU leaders and the Congressional Black Caucus demanded the change be reversed. As a result of their pressure, the Education Department rewrote the rules to make it easier for low-income parents with bad credit to borrow. Money began flowing again.

But none of those actions changed the dire underlying financial circumstances of low-income Black families struggling to send their children to college. New analysis of Education Department data show just how risky PLUS loans are for these families. This analysis also shows that when parent loans and student loans are considered together, federal student loan policies are driving an intergenerational accumulation of debt that burden the neediest families.

There is, sadly, ample precedent for this. For decades, federal, state and local policies, whether intentionally or unintentionally, have been crafted in ways that promote the wealth and advancement of white families while shutting families of color out. Each new widening of the racial wealth gap makes it more likely that the next allegedly neutral or universal program will in fact make the gap wider still.

"When parent loans and student loans are considered together, federal student loan policies are driving an intergenerational accumulation of debt that burden the neediest families."

This is what has happened with the Parent PLUS program. Although technically any parent of a dependent student has access to Parent PLUS, these loans were created to give middle- and upper-income parents, who are predominantly white, access to fixed-rate lower-interest loans for expensive institutions. Originally, federal aid was targeted to low- and moderate-income students. But in 1978, middle- and upper-income families were faced with high interest rates and increasing tuition bills, and they wanted a piece of the financial aid pie. The passage of the Middle Income Student Assistance Act expanded low fixed-interest federal student loans to most families regardless of income.³ The PLUS loan program built on that expansion when it was created upon the reauthorization of the Higher Education Act in 1980.

But now, as the cost of college has increased enormously for everyone, financial aid has failed to keep pace, and stops way too short for the lowest-income families. Families of color, especially Black families, have seen their wealth wiped away through decades of discriminatory practices and policies including a housing crisis brought about in part by predatory lending practices.

Wealth goes beyond income. Policies that have promoted wealth accumulation for white families have resulted in their ability to pass on that wealth, from providing their children with down payments for houses—a step that unlocks community resources and high-quality school systems—to funding their education.⁴ Black families have never been able to build the same wealth, even when investing in higher education meant to level the playing field. Instead of higher education achievement disrupting the intergenerational wealth deficit, overreliance on higher-education debt worsens it.

This report looks at the Parent PLUS loan program and how it exacerbates the racial wealth divide by promoting debt among low-income Black families. The report focuses on Black families because they experience a wider racial wealth divide, and there is alarming new evidence that they also have the worst student loan repayment outcomes of any racial or ethnic demographic.⁵ The first part of the report examines the demographics of Parent PLUS families using Education Department data. It looks at average intergenerational debt for those families who borrow using PLUS and student loans. This analysis reveals that low-income Black families are burdened with large intergenerational education debts compared to their white peers. The second part of this report focuses on the implications of the racial wealth gap and how policies like PLUS have widened it. It shows how the PLUS program has come roaring back to life after the credit check regulation was weakened.

"Black families have never been able to build the same wealth, even when investing in higher education meant to level the playing field."

Given the enormous collection powers of the federal government, the Parent PLUS loan is becoming predatory for Black PLUS borrowers who are more likely to be low-income and low-wealth, and who will likely struggle to repay. This report ends with 12 steps that can be taken to help prevent the predatory lending that discourages wealth building among Black families and to ensure that students of color have access to an affordable higher education.