Op-Ed: Student Loan Underwriting Failures Undermine College Access

By NASFAA President Justin Draeger & Jill Desjean, NASFAA Policy Analyst 

What happens when our attempt to increase college access backfires, and instead of increasing college access, ends up putting disadvantaged families even further behind the economic eight ball? The federal Parent Loan for Undergraduate Students, more commonly known as the PLUS loan program, provides an unfortunate example.

For many middle income families, parent PLUS loans are a valuable tool that can help fill the gap between college costs and available financial aid. However, lack of proper underwriting standards have led to unintended and perverse consequences for some of our nation’s most vulnerable populations, saddling many low-income, and especially minority families, with unsustainable levels of debt.

To qualify for a parent PLUS loan, parents must have “no adverse credit,” but this criterion looks only at past repayment history without any regard for a parent’s ability to repay the loan based on their current income or existing debt obligations. As many parents are unfortunately discovering today, that is a pretty big underwriting flaw.

Too many parent borrowers who meet PLUS credit criteria will nevertheless struggle to repay their loans because they lack the income to support their debt. One quarter of parent borrowers earn less than $40,000 per year, and yet are borrowing on average $10,000 per year for college. For minority populations, the numbers are worse. Nearly one-third of black parent PLUS loan borrowers have incomes below $30,000.

Tacking on a loan payment not only jeopardizes these families’ current financial stability, but adds to intergenerational debt, potentially negating the economic benefits their children should realize from a college education. Past payment history alone is insufficient to judge a borrower’s ability to repay. And while students will increase their earnings by pursuing a college degree, parents will not be increasing theirs.

If the mortgage crisis of a decade ago taught us anything, it’s that good underwriting not only protects lenders, but just as importantly, protects borrowers. That is why private-sector lenders employ a debt-to-income ratio before approving loans.

Over the last several years, the Department of Education has adjusted underwriting criteria on parent PLUS loans in fits and starts. In 2011 the agency suddenly tightened their definition of adverse credit history after observing a spike in PLUS approvals following the switch to 100% Direct Lending, which removed private lenders — and their stricter approval standards — from the federal loan programs. The department changed course again in 2014, loosening the 2011 standards, after a 10% increase in overall PLUS denials (and as high as 75% at historically black colleges and universities) was observed.

Though requiring a debt-to-income test as part of the PLUS loan approval process is a sensible way to make loans only to parents who can afford to repay them, the Department of Education has declined to incorporate one, citing the need for legislative change. Unfortunately, few lawmakers are willing to touch the issue. Instead, federal policymakers are misdirecting their efforts to solve this problem, favoring solutions that hide the availability of the PLUS program altogether.

From Congress, Sen. Chuck Grassley’s Understanding the True Cost of College Act proposes to explicitly prohibit financial aid offices from including a PLUS loan amount on financial aid notifications. We’ve reached peak absurdity when federal laws prohibit institutions from notifying families about the amount of financial aid available to them through a federal program.

More recently, the “Best Practices for Financial Literacy and Education at Institutions of Higher Education” report released by the U.S. Financial Literacy Commission tackles the PLUS problem from an equally wrong angle. Its recommendations, including a broader adoption of debt letters and a focus on empowering borrowers to make good decisions, do nothing to address the fact that all the financial literacy in the world won’t help a borrower whose monthly PLUS loan payment represents more than what’s left after covering household expenses.

And finally, we have seen inconsistent and conflicting guidance from the Department of Education on how schools should inform families about the PLUS program. Their Financial Aid Shopping Sheet, a consumer tool designed to better help students compare financial aid packages at prospective schools, prohibits schools from even providing a PLUS loan amount as part of a student’s financial aid package, and instead buries PLUS information under an “Other Options” heading. In an improvement, the Shopping Sheet’s planned replacement for 2020 and beyond, the College Financing Plan, allows for a PLUS amount to be listed with all other student loans, but conflicts with recent guidance from the department that advises institutions against lumping student and parent loans together on aid offers.

The way to save families from getting in over their heads with education debt isn’t to keep the PLUS program a secret by tucking it into some far corner of the financial aid notification. If a consumer product were found to be tainted, regulators wouldn’t tell stores to push it to the back of the shelves in the hope that no one would buy it; they would require the manufacturer to remedy whatever underlying issue caused the problem in the first place. Similarly, PLUS loans should not be hidden from view. Instead, proper underwriting should be introduced into the approval process to ensure that families are only approved for the loan if they stand a chance of paying it back. While institutions may choose not to include a PLUS amount, they should not be forbidden from offering information about an existing federal financial aid program.

What we need from policymakers are proposals to fix parent PLUS underwriting by implementing a simple debt-to-income ratio. The goal would not be to mimic private-sector underwriting, which would too severely limit college access in the name of responsible lending and borrowing. Instead, the goal is to keep parent PLUS loan borrowing at responsible levels, with reasonable amounts of subsidy and risk from taxpayers, with parental income at the forefront, not the backburner of consideration.

 

Publication Date: 7/29/2019


David S | 7/29/2019 8:12:24 PM

Well said, Justin. When I served on the neg reg committee looking at the adverse credit standards a few years back, and I suggested that we needed a major change so as not to burden parents who will never be able to repay those loans, some thought me a heretic, opposed to access. But we're not doing people any favors by saddling them with debt that will someday stand in the way of them and their Social Security checks. And it's a bad look for higher ed and our profession to argue in favor of maintaining this...especially given what we know by now about what demographic groups are far more likely to experience problems with loan repayment.

G. Michael J | 7/29/2019 11:33:58 AM

Well said. Love the 'tainted' consumer product analogy. A debt to income ratio seems like a straightforward, easily implemented, and easily communicated aspect of borrowing that would keep a lot of parents from making a financial mistake that can last for years. As for what appears on aid offers, it has never been a good idea to include a loan that can be denied.

Joel T | 7/29/2019 9:24:43 AM

"What we need from policymakers are proposals to fix parent PLUS underwriting by implementing a simple debt-to-income ratio. The goal would not be to mimic private-sector underwriting, which would too severely limit college access in the name of responsible lending and borrowing. Instead, the goal is to keep parent PLUS loan borrowing at responsible levels, with reasonable amounts of subsidy and risk from taxpayers, with parental income at the forefront, not the backburner of consideration"

I do not disagree with this idea, but I guess I would ask how Mr. Draeger would operationalize this? Could college's still package loans for parents up front if they do not know how much they will be approved to receive? If not, will this hurt enrollment since they will not read all of the materials and see that the PLUS loan is an option?

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