The Parent Trap

Parent PLUS Loans and Intergenerational Borrowing

In fall 2011, the U.S. Department of Education quietly tightened the credit check criteria for Parent PLUS loans, a federal program that provides loans to parents to send their children to college above and beyond the federal loans available to students. As a result, many families and higher education institutions were shocked to find that parents approved for the loan one year were suddenly denied the next. Students in the middle of their academic careers found themselves scrambling to cover a much larger portion of their bill upfront. Incoming freshmen who had already paid their deposits were faced with a larger amount due than initially anticipated. Some institutions, such as historically black colleges and universities (HBCUs), witnessed declines in enrollment and a loss of revenue, forcing delayed physical plant maintenance, furloughs, and layoffs.

Since then, leaders of HBCUs have publicly demanded that the Department reverse the eligibility changes. “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,” remarked Carlton Brown, the president of Clark Atlanta University, “…A one year drop in over 50 percent of approved Parent PLUS applications, [and] more than $50 million in revenue losses.” The controversy over the changes even reached the front page of The Washington Post’s Sunday edition.

It’s true that the Department’s execution of the change was poor. It should never have left students on track to graduate suddenly scrambling to find the funds to remain in school. But the Department’s underlying motivation was sound. The federal government has made it much too easy for lower- and middle-income families—not just students—to get buried in debt, putting their financial well being at risk.

The Department was right in trying to prevent parents from borrowing loans they might not be able to afford. The size of a PLUS loan is only capped by a college’s full “Cost of Attendance” (COA), not just tuition and fees, but the total budget that a student may receive as determined by the institution. Since PLUS loans don’t build a parent’s human capital, they aren’t eligible for flexible repayment through Income-Based Repayment (IBR), a repayment plan that allows the borrower to repay the loan based on his or her income. They are also seldom dischargeable in bankruptcy.

If anything, the Department’s changes were too modest. More far-reaching reforms are needed to ensure that the Parent PLUS loan program is correctly targeted to families who can afford to pay the debt back. Policymakers should consider one of the following three options:

  • Add an “Ability to Pay” metric to the Parent PLUS credit check. In addition to a backward-looking credit check, adding an “Ability to Pay” metric would be able to better capture whether parents have the resources to pay back the loan. This would help ensure parents aren’t over-borrowing to send their children to college.

  • Cap Parent PLUS loans. Instead of allowing parents to borrow up to the full COA, the loans should be capped to prevent over-borrowing and to remove the incentive for institutions to increase revenue by raising their COA and funding the increase through Parent PLUS.

  • End the Parent PLUS loan program and increase dependent student loan limits. Many parents who take out federal PLUS loans would not be able to secure a loan in the private market. The government should not be in the business of lending loans to low-income parents as a de facto extension of the student loan program. To compensate for the loss of the program, policymakers should increase dependent student loan limits.

The Parent Trap explains what Parent PLUS loans are and how they became part of the federal financial aid landscape. It details the recent changes that the Department made and explores loan volume data to assess which sectors and institutions have been hit hardest by the changes. It then describes the problematic nature of PLUS loans for low-income families, and how institutions can use them to game accountability measures and make their prices more opaque to consumers. To conclude, the paper expands on the recommendations offered above and further explains how Parent PLUS loans should be reformed.

The report was being released in conjunction with a panel event January 8 at the New America Foundation from 9:30 a.m. to 12 p.m, which you can watch here. The event includes stakeholders from American Student Assistance, the Association of Private Sector Colleges and Universities, and UNCF as well as higher education thought leaders.

Please Note: This report has been updated on January 10, 2014 to correct enrollment data figures. This change in data did not change the underlying anaylsis and conclusions. Please visit our blog to learn more.




Rachel Fishman is the deputy director for research with the Education Policy program at New America.