Policy Recommendations

The PLUS loan credit check “fix” has allowed the program to come roaring back to life with little oversight and little to ensure families are not borrowing more than they can hope to repay. These loans put a parent’s future at risk, reduce the opportunity to build wealth and retirement security, and weaken the investment his or her children will see from a degree. There are so many policies that need to be addressed in order to help narrow the racial wealth gap in the U.S. Fixing the Parent PLUS loan and other changes to higher education policy are just small changes in a series of larger steps that local, state, and federal government must take to rectify racial wealth disparity.

Right now, the federal government provides “access” to higher education, via PLUS loans, to any college or university as long as a parent is approved. But if the parent is low-wealth, then a PLUS loan does not provide true access because it will ultimately result in harm and erasure of wealth when the bill is due. The switch to intergenerational debt-financing for higher education has worsened the racial wealth divide. The federal government’s role in higher education is important, and it already provides grants and loans to help students afford it, but that is not enough. In order to provide true access for low-wealth families, there must be a targeted investment that is not debt-financed and will completely bring down the cost of, at a minimum, public two- and four-year universities while holding institutions accountable for that investment.

There are several interim policy goals that Congress could address now with the program that will put it on firmer footing and end what are often predatory lending practices. But just fixing the Parent PLUS loan program does not even begin to address the inequality faced by Black families when it comes to accessing affordable, high-quality higher education that leads to degrees of value. That outcome requires long-term policy with strategies to promote reduction of debt and an affordable higher education to Black students and other historically disadvantaged students of color.

Interim PLUS Loan Policy Fixes

1) Preserve PLUS but Add an “Ability-to-Pay” Measure Using EFC. It might be tempting to end the Parent PLUS loan program and let the private market prevail. But turning things over to the private market usually leads to predatory products over time that are worse in terms of consumer protections. Instead, the Parent PLUS program should be preserved for those looking for a fixed-rate higher-education loan with stronger consumer protections.

Looking at a parent’s adverse credit history is not the only way to accurately assess whether or not someone has the ability to repay the loan. Someone with no income, no assets, and no credit history would be Parent PLUS-eligible, because that person does not have a bad credit history. Adding an ability-to-repay measure to the Parent PLUS credit check would be a much fairer standard, ensuring that parents are able to access a loan that is capped to prevent borrowing beyond their means. The government already collects information on a family’s ability to repay through the FAFSA and its calculation of expected family contribution. EFC could be used in tandem with adverse credit history to determine a family’s loan limit. If a family has a zero EFC, the parent applying for a PLUS loan would not be extended one. Instead, the student would be offered additional loans up to the independent lending limit, a process that currently happens when parents are rejected for PLUS loans based on adverse credit history alone. In other words, if a parent applies for a PLUS loan with EFC of zero to $4,000 or $5,000 depending on the year a student is in school, his child would instead be given access to $4,000 to $5,000 in federal student loans. Overall, Parent PLUS Loan limits would vary and be capped by EFC or COA, whichever is lower.

While it may be unsatisfactory to give more loans to low-income students, the loans made directly to students come with more protections than Parent PLUS loans, like access to income-driven repayment and lower interest rates. They also ensure the neediest of parents do not end up with non-dischargeable debt as they close in on retirement. Students should also be required to exhaust their own loan eligibility before their parents turn to PLUS.

2) Prevent Institutions from Listing PLUS Loan Amounts in Financial Aid Award Letters. Once students are accepted into college, they receive a financial aid award letter detailing what federal, state, local, and institutional aid for which they are eligible. An analysis by New America and uAspire of thousands of award letters to predominantly low-income families revealed that 17 percent of letters contained PLUS loans.¹ A Parent PLUS loan amount should never be packaged anywhere within a student’s financial aid award letter as it is not a guarantee and is not direct aid to the student. Institutions should be encouraged to adopt the Education Department’s Financial Aid Shopping Sheet as their aid letter or at a minimum only mention Parent PLUS loans as a way to cover outstanding expenses along with other options, with no amount given.

3) Require Entrance Counseling and Better Disclosure Surrounding Terms and Conditions of PLUS Loans. Entrance counseling is required of all federal student loan borrowers but cannot be required for Parent PLUS borrowers. The only counseling requirement currently mandatory for Parent PLUS borrowers is when a parent is rejected but wins an appeal. Going forward, Congress should make all federal higher-education loans align with current entrance counseling requirements. Parent PLUS entrance counseling must indicate that the loan is borrowed by the parent, is non-transferrable to the student, and is not eligible for income-driven repayment plans. It must also explain repayment options, including deferments and forbearances, and that the loan is not dischargeable in bankruptcy. Finally, it should clearly state that failure to pay not only results in damage to credit scores but could also result in wage garnishment, Social Security offsets, and seizure of tax refunds.

4) Collect Better Data on PLUS Loans. The Education Department should release more detailed information on PLUS loans, broken out by loan type. As research in this report has shown, the only way to understand the demographics of PLUS loan borrowers currently is through triangulation using U.S. Department of Education surveys of students. The lack of default data makes it almost impossible to determine whether PLUS loans are predatory. The problems with PLUS loan data are twofold: 1) Parent PLUS and Graduate PLUS, federal loans made for graduate education, are often combined even though the demographics of borrowers are different; and 2) Parent PLUS loan data are not reported and sometimes not even collected. Right now, policymakers are operating blind when it comes to understanding and diagnosing problems with the PLUS loan portfolio. In the aggregate the portfolio performs well, but even with the limited data available there are worrisome issues with PLUS. Without better information, it is difficult to craft thoughtful solutions. The Education Department should release the following data by institutions, sector, and portfolio, separated by Grad and Parent PLUS: lifetime (20- or 30-year) default rates; cohort-default rates; PLUS loan repayment outcomes including delinquency, by income and race; data to calculate accurate repayment rates; and data to calculate total familial indebtedness by linking PLUS and undergraduate debt.

5) Hold Colleges Accountable for Parent PLUS Default Rates. Parent PLUS loans are not included in institutional cohort default rate calculations, making them a no-strings-attached revenue source for colleges and universities. Colleges and universities should face the same accountability for these loans as subsidized and unsubsidized direct loans. Three-year institutional cohort default rates should be calculated for Parent PLUS. Just like with current cohort default rate policy, institutions should face sanctions if their Parent PLUS default rate is at least 30 percent (if not lower, since parents must pass a credit check), including loss of eligibility to offer PLUS loans if the rate remains high year over year.

6) Allow Parent PLUS Loans to be Dischargeable in Bankruptcy. Higher education loans, whether federal or private, are not usually dischargeable in bankruptcy. While private higher-education loans should be dischargeable like other consumer debts, federal loans will likely remain nondischargeable as they are backed by taxpayer dollars. The Trump administration put out a call for comment on what the government should do when evaluating whether student loans should be discharged in bankruptcy. It is promising that the administration is exploring ways in which to simplify the process for getting loans discharged. Given that there are hardly any safety valves for Parent PLUS debt, and that of all loans within the federal portfolio of higher-education loans it most closely mimics private debt, the path to discharging PLUS debt should have a simpler test compared to current standards. In the future, Congress should make PLUS loans dischargeable in bankruptcy, especially because it already has some underwriting, given the adverse credit history check, and even more so once an ability-to-pay measure is added to the credit check.

7) Improve Parent PLUS Loan Servicing. There are very few relief mechanisms for Parent PLUS debt other than deferment, forbearance, graduated repayment plans, and consolidation. Servicers working with Parent PLUS borrowers who struggle to repay must explain deferment and forbearance options along with federal consolidation options, especially if the borrower has exhausted her hardship deferments or said that her financial situation is unlikely to change. If a PLUS borrower has large PLUS debt, consolidating will stretch out monthly payments over a longer time, meaning a lower monthly payment. And, servicers should explain, in many situations consolidation into a direct consolidation loan will allow PLUS borrowers to access Income-Contingent Repayment.

Long-Term Policy Goals

8) Promote “Race Conscious” or “Targeted Universalism” Financial Aid Policies. It is clear that current higher education policies exacerbate the racial wealth gap. Because the risk of debt is much higher for students of color, especially Black students, every attempt must be made to reduce the price of a college education on the front end either through direct grant aid (for example, a double Pell Grant for students of color with zero EFC) or aid to institutions that predominantly serve those populations. It is hard to conceive what a program such as this would look like, but it would have to be a large investment of money specifically to help students of color, primarily Black students and other groups such as American Indians, who are often masked in outcomes data due to their small population. This money could come from the tens of billions of dollars that are allocated for higher education benefits in our tax code that overwhelmingly benefit wealthy families.²

This aid could be need-based but given how wide the racial wealth gap is, an argument could be made to make it non-need-based. The only stipulation on this aid would be that it not be available to the for-profit sector, which has had poor outcomes with students of color. And the answer should not be to leave price reduction and aid distribution to states alone. In the past, as seen with the state implementation of the G.I. Bill, biases led to unequal distribution of benefits to veterans of color. For this reason, there would have to be a strong federal and state partnership in place to distribute that aid and make debt-free college a reality for students of color.

9) Hold Institutions Accountable. There is very little accountability in federal higher education policy, letting billions of taxpayer dollars flow to institutions, including taxpayer-backed higher-education loans that have the potential to leave some students worse off than if they had never enrolled. New America has previously discussed accountability measures in Starting From Scratch: A New Federal State Partnership for Higher Education.³ These measures have two goals: 1) to ensure that public dollars are well targeted; and 2) to help students and families make well-informed decisions about their educational investments.

Accountability metrics, peer groups, and sanctions should be developed in consultation with relevant stakeholders including colleges and universities, their membership organizations, accreditors, federal and state policymakers, and student groups. At a minimum, these metrics must focus on the number and percentage of students who progress through their programs in a timely fashion, graduate or successfully transfer to the next step in an educational track, and secure employment that pays a family-sustaining wage after leaving college. These data would need to be collected at the student level and would require Congress to authorize a Student Level Data Network. This would allow data to be disaggregated by various demographics at the institutional, programmatic, and student level.

10) Keep Strong Regulation of the For-Profit Sector in Place. Under the Trump administration and a Republican Congress, moves have been made to undo critical regulations and laws meant to reign in an industry that often leaves students, especially Black students, degreeless and in debt. From the Education Department rewriting the Gainful Employment regulation, to the PROSPER Act rescinding a rule that would allow for-profit colleges and universities to receive up to 100 percent of their revenue through taxpayer dollars, to allowing Pell Grants for short-term programs that will not prepare students for a career, the renewed traction of the for-profit industry is a move in the wrong direction for students and taxpayers. Strong laws and regulation of for-profit higher education is essential to prevent harm to students and prevent waste of taxpayer dollars.

11) End Legacy Admissions and Other Preferences that Correlate with Wealth. Although most students attend open-access or less-selective higher-education institutions such as community colleges and regional public and private institutions, many low-income students are shut out from highly selective colleges and universities. When low-income students are able to enroll in selective higher-education institutions, they fare as well as their wealthier peers and often receive more resources and monetary support from the institution.⁴

Low-income students of color who are academically qualified should have the opportunity to attend a prestigious college or university without going through a cumbersome and opaque admissions and financial aid process. For this reason, the most highly resourced and highly selective institutions should end legacy admissions and other preferential admissions treatment that overwhelmingly favor wealthy and white families, including early decision programs.⁵

12) Allow for Targeted Loan Cancellation and Preserve Public Service Loan Forgiveness. As shown in this report, many Black student loan borrowers, even those who have bachelor’s degrees, struggle to repay their debt years later. Many fall delinquent or default on their loans. A renewed investment into Black students as called for in this paper will reduce, or perhaps even do away with, borrowing for these students. But for those borrowers currently in the system, struggling with debt and facing labor market discrimination and/or degrees with little value, there must be a way to cancel debt sooner than signing up for an IDR plan and waiting 20 to 25 years for forgiveness while interest accrues. Those who fall delinquent on their loans should be able to have their debts canceled if, for example, they have received a means-tested federal benefit such as enrollment in Medicaid, Supplemental Security Income (SSI), or Supplemental Nutrition Assistance Program (SNAP) for a determined number of consecutive years of repayment.

Additionally, given that Black college-educated workers are overrepresented in federal and state government, preserving Public Service Loan Forgiveness (PSLF) is important for narrowing the racial wealth gap.⁶ This program allows borrowers in IDR plans who make 10 years of on-time payments, and who work full time for the government or a nonprofit to have their loans forgiven.