Low-income parents scrambling to help their kids pay for college may be lured into taking on loans they can’t really repay, say some prominent education scholars.
This comes at a time when the Department of Education tries to iron out kinks in its eligibility requirements for the Parent PLUS loan program, which allows parents to borrow up to the total cost of sending their kids to college for four years, regardless of their ability to repay.
PLUS loans require a check for red flags in recent credit history, but they do not even allow, much less require, any scrutiny of a family’s debt to income ratio. In 2011, the Department of Education tightened scrutiny of flawed credit, expressing fears that parents would be overburdened with debt beyond capacity to repay. This provoked a backlash from schools and some parents, and sparked an ongoing debate as to how rigorous the credit check should be.
But even with the tighter access rules, critics argue, many families could be taking on debt that is mathematically unsustainable — even when the family has no recent blemishes on its credit record.
Because the parent loans are buried in the fine print of a college financing offer, many parents end up acquiring debt they cannot afford, argues Awilda Rodriguez, a fellow at the American Enterprise Institute, in a recent analysis on the Parent PLUS loan system.
Since the publication of her paper, Rodriquez says she has received multiple emails by parents who are now in a financial bind, struggling to repay loans they can’t afford.
“No one wants to be the dream crusher,” Rodriguez said, noting that she was raised in a low-income household. “But these are emotional purchases, and many parents are going above and beyond what they can do.”
Access or burden?
As college costs have continued to climb over the past decade, colleges have become heavily reliant on loans made directly to parents to supplement other college financing, and parents likewise have come to depend on them.
When DOE began tightening PLUS eligibility in 2011, tuition-reliant colleges were the first to feel pain. Hardest hit were schools such as for-profit and historically black colleges, both heavily dependent on tuition from low-income students.
The schools fought back, arguing that the tighter DOE loan standards were limiting access to education for poor families. And no one disputes that the DOE did make these rule changes very quietly, and that many students were caught off guard and suddenly without funding as a result.
But David H. Swinton, president of Benedict College, a historically black college in Columbia, South Carolina, challenged the tighter rules, arguing that PLUS loan defaults at just over 5 percent are much lower than those of standard student loans.
“From my point of view, the data made it clear that there is no need to tighten any criteria,” Swinton told Inside Higher Ed last month. “It makes clear that there is no significant default problem with the PLUS loan program.”
For schools that depend on the loans, Rodriguez acknowledges, freely available parent PLUS loans mean the difference between liquidity and bankruptcy, especially as higher-education costs have outstripped the combined leverage of free Pell grants and subsidized student loans.
But viewing PLUS loans as a revenue source for the school is perverse, argues Rachel Fishman, an education policy analyst with the New America Foundation in Washington, D.C.
The questions, Fishman argues, should be squarely centered on students and their families and whether they can afford the burdens they are acquiring. There are, she says, ample evidence that consumer protections are lacking.
For some families at the upper end of the economic scale, Parent PLUS loans can work, Fishman says. In some cases, it makes sense for parents to get up front the liquidity of the loan and then pay it off with their higher earning power over time.
But at the lower end of the economic scale, things are very different. The average amount borrowed by a parent using PLUS loans for students currently in college, Rodriguez says, is around $19,000. That includes first-year students as well as those near graduation.
A parent who borrowed $40,000 at the standard 6.25 percent PLUS loan rate would be paying $450 a month over 10 years on the loan. Few low-income families could afford those payments, Rodriguez says.
“This can be a very predatory product,” Fishman said. “PLUS loans don’t solve the college affordability issue. Someone is on the hook for paying that money back. There are low-income parents getting this loan who may never be able to pay it back.”
Missing data
How many parents are struggling to repay these loans? What are the profiles of those who fail? And which institutions produce default?
What’s most disconcerting to critics is how much we don’t know to each of these questions. Recent data from the Department of Education show that, overall, 5 percent of the PLUS loans made in 2010 are now in default. But over 13 percent of those made for attending for-profit colleges are in default.
“We don’t know if the loans are doing more harm than good,” said Beth Akers, a fellow in the Brookings Institution's Brown Center on Education Policy.
Rodriguez does report that a disproportionate amount of PLUS loans go to a limited number of schools. In the 2012-13 school year, 30 institutions took in $1.6 billion in PLUS loans, while the remaining 3,751 accounted for $7.6 billion of the tally.
Of the 30, two were for-profit schools and 20 were four-year public universities, mostly state flagships. Many state universities are heavily dependent on out-of-state tuition, which is often supplemented by Parent PLUS loans.
Moreover, Rodriguez notes that a quarter of PLUS loan recipients attended schools with graduation rates below 50 percent, and one fifth of PLUS loan dollars flowed to these high-failure-rate schools. While this is a fraction, Rodriguez says, it is a sizable fraction, and calls into question what the parents are getting for their unforgivable debt burden.
While we know where the money went, we know next to nothing beyond that. The Department of Education does not release default rates by school, for example, and individual-level data is completely off the table.
“Ideally, you would want to know how much people borrow, where they go to school and what they studied,” Akers said. “And then you would want information about their outcomes after school, with long periods of earnings and employment information.”
This would be called the “unirecord system,” Akers said, and all of this is actually available. But current law prevents the government from creating this data set due to deeply rooted suspicions about how trustworthy government is to handle personal data.
“The graph we want, we can’t make,” agrees Rodriquez. “But I know things anecdotally that I can’t represent with data.”
She has, for example, spoken with college guidance counselors who tell her of families who take on a large chunk of debt, begin to make payments on it, and then quit once they realize they can’t afford it. There is no data on how often this happens, where it happens, or what happens to these families, she notes.
Even with privacy concerns, Rodriguez notes, there are many pieces of the puzzle that are currently not being assembled by the Department of Education, and data analyzing traditional student loans is far more expansive.
You can go wrong
In theory, Akers argues, unlimited access to borrowed capital is not necessarily wrong, as long as parents and students have solid information on risks and costs. But in fact, she says, people don’t do these calculations, partly because the numbers are so complex and the horizon of payoffs and burdens seems so distant.
And then there is the added signal that the government sends by allowing unlimited borrowing up to the total cost of attending school. And the colleges echo that signal by building parent loans into their aid packages.
“The ability to borrow large amounts sends a message that you should be going to college at any cost,” Akers said.
Unlimited parent loans, critics argue, help fuel a mystique that tells parents that they should be willing to pay any price and bear any burden to send their kids to college. This in turn allows the institutions a carte blanche for raising tuition and fees, regardless of their clientele’s actual ability to pay.
“Many of these institutions cannot really afford a lot of low-income students,” Rodriguez argues.
But skeptics are hopeful that parents and taxpayers are beginning to rethink the paradox of access through parental debt burdens.
“There has been a tremendous shift in the narrative,” Akers says. As recently as 2009, she notes, President Obama was touting college graduation as an end in itself. But in his 2013 State of the Union address, he promoted a new website he hopes will help consumers distinguish between good and bad institutions.
“So we’ve gone from ‘everyone should go to college’ without any qualifications,” Akers said, “to now where people are saying that everyone should make this decision very carefully. It’s a critical decision. You can go wrong.”