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Parent PLUS loan seen as parent trap

Whether PLUS loans are promoting access to college or putting parents at financial risk was the topic debated by a panel of experts on Jan. 8. The New America Foundation’s Education Policy Program hosted this event about the PLUS loan controversy and the subsequent impact on families and students, as described on its event description site.

Education loans soar for students and parents
Photo by David McNew/Getty Images

Invited participants were “stakeholders from American Student Assistance, the Association of Private Sector Colleges and Universities, and UNCF as well as higher education thought leaders,” according to New America’s program description.

The public was also encouraged to join the conversation online via Twitter by following @NewAmericaEd and using #PLUSloan. Topics included college affordability, intergenerational borrowing and what it means for student access to higher education.

New America is a nonprofit, nonpartisan think tank. Parents and students may watch the almost two-hour event on this video.

PLUS loans

Direct PLUS loans are federal loans made to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid. The U.S. Department of Education (ED) is the lender. The maximum loan amount is the student’s cost of attendance (COA), determined by the school, less any other financial aid received. Tuition and fees, room and board, books and supplies, transportation and miscellaneous expenses are counted as COA, permitting annual borrowing of up to tens of thousands of dollars.

The FAFSA, first available for filing by students each January for the next school year starting in the fall, serves as the PLUS loan application.

The interest rate for Direct PLUS Loans is currently fixed at 6.4 precent. There is also a 4.288 percent loan origination fee when first disbursed on or after Dec. 1, 2013.

Usually borrowers must not have an adverse credit history but may still receive a PLUS loan under certain circumstances according to the ED’s website.

Controversial change in PLUS

In determining whether a PLUS loan applicant has an adverse credit history, ED changed how it evaluates the 90-day debt delinquency, in the fall of 2011. “Ensure parents aren’t taking loans they can't pay back,” is one of ED’s rationales for the modification, a screen of the downloadable powerpoint presentation mentions.

A direct result of the change was a 50 percent increase in PLUS loan denial rates. Historically black colleges and universities (HBCU) and for-profit colleges were greatly impacted, another screen shows. This led to decreased enrollment, loss of revenue, delays in physical plant maintenance, furloughs, and layoffs, according to the policy brief of The Parent Trap report about Parent PLUS loans and intergenerational debt.

Students also suffered. Incoming freshmen whose parents were denied loans after they paid enrollment deposits were suddenly faced with a much steeper bill. Upperclassmen relying on prior parent approvals were immediately faced with a huge financial shortfall on their college bill.

The Parent Trap

The Parent Trap report was released in conjunction with the panel discussion. Written by New America policy analyst Rachel Fishman, it explains the history of Parent PLUS loans, recent changes and those most affected by the changes. It concludes with recommendations for Parent PLUS loans reforms such as:

  • Factor in “Ability to Pay” in addition to a credit check.
  • Cap Parent Plus loans to prevent over-borrowing and remove an incentive for schools to increase revenue by raising their COA and funding the increase via Parent PLUS.
  • Prohibit institutions from including Parent PLUS loans in financial aid awards.
  • Explore including Parent PLUS loans in Cohort Default Rate calculations to make schools accountable for repayment.
  • End Parent PLUS loan program and increase dependent student loan limits.

College affordability options

Students need access to college but their college dreams shouldn’t put parents at financial risk. Parents should review their finances and have a realistic repayment plan before applying for any government or private education loan because there is no retirement loan.

Here are ten college affordability options for students:

  1. Check the school’s stats before applying (graduation rate, student debt amounts, student loan default rate, average discounts on tuition).
  2. Search for scholarships sponsored by large and/or local businesses, institutions, employers, high schools, private organizations and groups.
  3. Apply for federal and state financial aid.
  4. Carefully compare financial aid awards from schools offering admission.
  5. Appeal inadequate financial aid award from choice college with documentation about true financial situation, through the school’s Financial Aid Office.
  6. Ask the school about grants, scholarships and work-study opportunities instead of loans.
  7. Get a part-time job that does not interfere with studies.
  8. Do not attend an unaffordable college.
  9. Commit to graduating on time to contain college costs.
  10. Before borrowing, have an affordable repayment plan considering ability to repay based on lifestyle sought and beginning salaries in field of study.

Students whose parents are denied a PLUS loan may be eligible for additional unsubsidized Stafford loans but should be careful not to join the ranks of students who are drowning in too much student loan debt. The purpose of higher education is to enhance futures not endanger them. Parents can help their students use all tools and checklists available to help them prepare for college, estimate college costs, and pay for college.

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