A federal student loan program originally intended to fill a funding gap for middle- and upper-income families has, through a complex web of deeply-rooted socioeconomic inequities, instead turned into a path that intensifies the racial wealth gap for black families, according to a report from New America.
Rather than helping expand access to higher education and promote social mobility, the Parent PLUS loan program has done the opposite for many black families in America, Rachel Fishman, deputy director for research with the Education Policy program at New America, writes in the report released on Tuesday. Problems with the program were brought to the forefront in recent years when the Department of Education (ED) changed underwriting standards on PLUS loans that resulted in scores of previously-approved parents and graduate students being suddenly denied. The change hit students at open access schools and Historically Black Colleges and Universities (HBCUs) hardest. The entire situation ultimately resulted in a public apology from then Secretary of Education Arne Duncan, and a slight tweak to the approval process.
Despite the challenges with the credit check process for Parent PLUS loans, the program as a whole has exacerbated wealth inequality problems that stem from the first GI Bill implemented after the end of World War II. Conditions related to that bill made it difficult, if not at times impossible for black families to secure home loans, which led to de facto segregation through discriminatory lending policies.
"It is deeply important that students receive education beyond high school, and yet the ladder of educational opportunity — access to high-quality, affordable colleges and universities — stops short for many students, especially students of color," the report said. "As higher education has become increasingly debt-financed, Black families have been caught flat-footed because debt is inextricably tied up with wealth and wealth is inextricably tied up in assets that, through a series of policy decisions, are more likely to be held by white families."
That started a chain reaction of sorts. Unable to move out of racially segregated neighborhoods, black families were left in areas with under-resourced K-12 schools, which made it difficult to gain admittance into prestigious colleges and universities with the means to provide more financial aid. Black veterans also did not have the same access to the postsecondary education benefits as their white peers, the report said. While they were steered toward vocational schools, enrollment in colleges and universities surged, which further inhibited access.
Federal financial aid was greatly expanded with the implementation of the Higher Education Act (HEA) in 1965, the expansion of the federal loan program to all students not long after, and the creation of PLUS loans for parents and graduate students. But over time, grant-based financial aid has failed to keep pace with the rising cost of higher education. Coupled with funding issues at the state level that drove up the cost of college, many low-income families have turned to Parent PLUS loans to fill the gap.
As a result, Fishman writes, the Parent PLUS loan program "is becoming predatory for Black PLUS borrowers who are more likely to be low-income and low-wealth, and who will likely struggle to repay." The inability to repay creates other issues that prevent those families from saving for retirement or helping their children with down payments for a home, as some wealthier white families do. Because Parent PLUS loans are in most cases not eligible for income-driven repayment plans, those unable to repay are at a higher risk of default.
In the report, Fishman shows that broadly among all PLUS borrowers, the proportion of borrowers tends to increase as adjusted gross income (AGI) increases — most borrowers come from families making more than $75,000 each year, when looking at the data this way.
But when the data are broken down by race, it presents a different story. Although for white families, a smaller share of low-income families are PLUS borrowers, it's the exact opposite for black families. About one-third of black borrowers are from families with an adjusted gross income of less than $30,000. Just 1 in 10 come from households with an AGI of more than $110,001. By comparison, just 12 percent of white PLUS borrowers come from households in the lowest income bracket, while 32 percent come from the highest.
The breakdown of borrowers by Expected Family Contribution (EFC) "paints a stark picture of the inequity of debt burdens when it comes to paying for college," Fishman writes. One-third of black PLUS loan borrowers have a zero EFC, while just 9 percent of white PLUS loan borrowers have a zero EFC.
"Arguably, no family with a zero EFC should take on a PLUS loan, as EFC is a rough approximation of the ability to repay a loan," the report said. Still, those lowest-income families "who the federal government expect to contribute nothing to the cost of their attendance because their need is so high" have an average combined or "intergenerational" debt of nearly $27,000, the report said.
And it's not that low-income black students whose parents took out PLUS loans are attending higher-cost institutions, Fishman notes. Those students are more likely to be enrolled in more affordable institutions — nearly half (47 percent) attended public four-year institutions.
Recent research has also pointed out that the burden of student loan debt appears to fall more heavily on black students — about one-quarter of black borrower with a bachelor's degree default on a student loan, compared with 9 percent of borrowers with bachelor's degrees overall, the report said. Black borrowers who earn their degrees are also more likely to default on a student loan than their white peers who drop out of college, the report continued.
"Yet even these sobering numbers do not include the additional burden of intergenerational debt and the repayment outcomes of various demographics of parent borrowers," the report said. "It is hard to know for sure, but it is likely that repayment outcomes of student borrowers are correlated with parent repayment outcomes, especially given that some parents expect their children to repay PLUS loans. Given the debt crisis for Black student borrowers, there is likely a debt crisis for Black parent borrowers as well."
The report goes on to make several "interim" and long-term policy recommendations to "provide true access for low-wealth families" and fix the Parent PLUS loan program. Fishman makes short-term recommendations such as adding an "ability-to-pay" metric using a family's EFC to prevent some families from taking on debt they will not be able to repay. In lieu of a PLUS loan, the student would be given the option to borrow an additional amount in federal student loans up to the independent lending limit. While it might not be ideal to replace loans with loans, Fishman writes, the loans made directly to students come with protections PLUS loans can't guarantee.
Fishman also recommends preventing institutions from listing PLUS loan amounts on financial aid award letters "as it is not a guarantee and is not direct aid to the student," enhancing entrance counseling and disclosure of terms and conditions for PLUS loans, collecting better data on PLUS loans, calculating Parent PLUS loan cohort default rates to hold institutions accountable, and making changes to improve PLUS loan servicing.
For broader, long-term policy goals, Fishman argues policymakers should promote "race conscious" or "targeted universalism" financial aid policies, such as a double Pell Grant for students of color with a zero EFC. She also writes that institutions should be held more accountable through metrics, peer groups, and sanctions based on borrower outcomes, that regulations meant to provide oversight of the for-profit sector should remain in place, that legacy admissions and other preferential admissions practices should end, and that some form of loan cancellation should be available for certain borrowers.
"There are so many policies that need to be addressed in order to help narrow the racial wealth gap in the U.S.," the report said. "Fixing the Parent PLUS loan and other changes to higher education policy are just small changes in a series of larger steps that local, state, and federal government must take to rectify racial wealth disparity."
Publication Date: 5/16/2018