Parent PLUS Loans a Minus for Many

As college costs have skyrocketed, one thing is clear: Parent PLUS loans have increasingly become a giant minus for many families. According to a recent article in The Chronicle of Higher Education, the government issued $10.6 billion of Parent PLUS loans to approximately one million families last year. That’s nearly double the amount of borrowers and an increase of $6.3 billion in inflation-adjusted dollars since 2000.

Parent PLUS Loans, which are taken out by parents on behalf of their children, act most like a private loan compared to other federal loan options. PLUS loans have a relatively high fixed interest rate of 7.9 percent. Additionally, parents do have to meet a minimal standard to qualify—they cannot have adverse reporting on their credit history and have to pass a “credit check.” But this credit check is different than the check that is normally done for a private loan. It is quick, simple and does not consider income or ability to repay the loan.

Unlike other federal student loans, PLUS loans have no cap—parents can borrow up to the full “Cost of Attendance” (COA) for the institution. These loans aren’t dischargeable in bankruptcy and don’t normally qualify for repayment options designed to help struggling borrowers, like Income-Based Repayment. As a result, families who find themselves in over their heads on PLUS debt can be forced to make difficult choices, like postponing retirement.

The data reported by the Chronicle are probably the bellwether of a developing PLUS loan crisis. The problem can’t be completely solved until college costs are reined in, which may never happen, especially if we keep handing out easy cash in the form of PLUS loans to institutions (chicken, meet egg!). But in the meantime federal policymakers should do at least two things to start containing what appears to be a burgeoning crisis:

Stop running the program by the seat of its pants: Collect and report better data

The Department of Education does not analyze and publish data for PLUS loans at the same level it does for other federal education loans. We don’t, for example, have good default rate data specifically for Parent PLUS Loans--only budgetary projections made by the Education Department. And many of the key data points in IPEDS like "Average Amount of Student Loan Aid Received by First-Time, Full-Time Undergraduates" don't include PLUS in the calculation since they are taken by the parent, not the student.

According to Mark Kantrowitz, financial aid expert and publisher of FinAid.org, “Right now, the government runs the [PLUS] program by the seat of its pants.” We’re operating almost blind when it comes to these loans. It’s next to impossible to understand whether the program is working and how to make it better if we don’t have access to good data.

Encourage smart borrowing: Require adoption of the Financial Aid Shopping Sheet

Currently, some colleges and universities package loans within a student’s financial aid award, sometimes making it seem like a student won’t owe anything for his or her education. Packaging loans together with grants is bad enough, but Parent PLUS loans should never be packaged anywhere within a student’s financial aid award. A loan that is not a guarantee to the parent and is not the student’s responsibility to pay back should not be presented so easily to a student as a way to fund his or her education.

As I’ve advocated here at Higher Ed Watch, institutions need to adopt a model financial aid letter, like the proposed Financial Aid Shopping Sheet. This financial aid award cover sheet separates grants/scholarships from loans and work study. Parent PLUS loans are only mentioned in a list of “other options” that may be available to meet a family’s unmet need. Parents interested in exploring the PLUS loan further would have to contact the financial aid office. If institutions want to encourage smart borrowing, they can start by ensuring their award packages are transparent to foster better decision making among students and families, even if that means a student decides to attend another school that is more affordable.

Ultimately, students and families need more and better information when it comes to financial aid options and policymakers need to know whether the PLUS program is working.  In order to do so, the Department of Education should start analyzing the data they have and collect any new data it may need. Congress should require institutions to adopt a model financial aid letter. Decisions that have such costly and long-lasting implications for students and taxpayers should not be made in such complete darkness.  

Edited 10/10/12 to clarify data availability and analysis under "Collect and report better data"