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Parent PLUS loans are a dubious higher-ed option, study finds

Published: Monday, May 12 2014 12:05 a.m. MDT

Xavier University student Triton Brown studies in a common area on campus before going to one of his part time jobs in New Orleans on Friday, Feb. 8, 2013. Thousands of students unexpectedly either had to stay at home, transfer to a less expensive school or find new money when the U.S. Department of Education quietly changed how it evaluated the credit of parents applying for a federal PLUS loan. Brown, a Milwaukee native who is a freshman at Xavier University of Louisiana, said his family was counting on a PLUS loan, but his mother's application was rejected after he had been accepted the previous semester.

Gerald Herbert, Associated Press

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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.

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