Last year the U.S. Department of Education tightened eligibility requirements for federal PLUS loans, leading to a significant increase in rejection rates, from 28 to 38 percent. Many families and higher-education institutions were shoc...
Last year the U.S. Department of Education tightened eligibility requirements for federal PLUS loans, leading to a significant increase in rejection rates, from 28 to 38 percent. Many families and higher-education institutions were shocked to find that parents approved for Parent PLUS loans one year were suddenly denied the next. Some sectors, like historically black colleges and universities (HBCUs), were hit harder than others. In response to concerns over the changes, the Education Department added PLUS loan eligibility criteria to a list of potential topics to be considered for regulatory action. As part of this process, the Education Department asked for written comments and held four public hearings to allow individuals to provide testimony. One of these hearings was held at Spelman College, an HBCU in Atlanta. I attended the day-long meeting, where scores of representatives from HBCUs criticized the changes made to the credit requirements for Parent PLUS Loans.The testimony from the president of Clark Atlanta University was representative of the day’s tone: “The drastic decision to change the credit regulations for 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 …A one-year drop in over 50 percent of approved Parent PLUS applications, [and] more than $50 million in revenue lost.” It was a storyline repeated throughout the day—not only did the PLUS loan change inhibit access to college for low-income students, but it also caused institutions to lose millions of dollars in revenue.While the Department of Education was opaque in the changes it made to the credit requirements that caused the rug to be pulled out from under many students, the subsequent bad publicity surrounding the Department’s bungled implementation masked an equally important part of the PLUS loan story. The changes were modest and were meant to prevent overburdening low-income families with significant amounts of debt.The Department was right in trying to prevent parents from borrowing loans they cannot afford. Unlike federal student loans, Parent PLUS loans are borrowed by parents. PLUS loans allow parents whose children are already eligible for student loans to borrow even more. Since parents are investing in the future of their child, not in their own human capital, it means that their earnings—and the ability to repay loans—are largely unchanged by their child’s education. Since parents don’t receive direct financial benefit from the loan in terms of increased income, it’s not good federal policy to saddle parents with debt they can’t afford—debt that is seldom dischargeable in bankruptcy and that doesn’t qualify for the protections of other federal student loans, including a lower interest rate and income-sensitive repayment.While it makes sense for the federal government to provide students access to loans without consideration of their current ability to pay, this should not be the case for parents. Because an “Ability to Pay” metric is not currently included in approval for Parent PLUS loans, the Department had to figure out other criteria to identify whether parents could pay off these loans. Before October 2011, prospective parent borrowers couldn’t have any current accounts more than 90 days delinquent, or any foreclosures, bankruptcies, tax liens, wage garnishments or defaults in the past five years. After October 2011, the Department expanded its definition of what was considered a 90-day delinquency to include accounts whose most recent status was “in collections” or “charged off” in the last five years. This means that if a parent went into collections in the past five years and fixed her status, then she would be approved. But if a parent went into collections within the past five years and never managed to rehabilitate the status—indicative of continued financial troubles—she would be ineligible for a Parent PLUS
