By Owen Daugherty, NASFAA Staff Reporter
Parent PLUS loans are again receiving scrutiny following a recent report from The Wall Street Journal detailing how some institutions of higher education are promoting the loans as an option to parents to finance their child’s higher education pursuits.
The use of these types of loans has become more prevalent in recent years, though they have come with increased skepticism as the number of families taking out Parent PLUS loans has resulted in parents now borrowing more than undergraduates take out in loans, according to the news outlet’s analysis of federal data.
PLUS loans are only available to parents and graduate students and differ from traditional student loans in several key ways. For one, borrowers can take out as much is need up to the cost of attendance minus any other financial aid received to cover the cost of tuition, and there is no aggregate limit. Additionally, unlike Direct Loans, borrowers with Parent PLUS loans may have difficulty enrolling in an income-driven repayment plan, meaning if a family or parent were to experience a loss of income, they could be saddled with an unaffordable monthly payment.
The Journal notes these loans have been “a boon in particular for aspirational private colleges, allowing them to charge nearly as much as some top-tier schools but not provide the same level of financial help from the schools’ coffers.”
Notably, the article reports those most often taking out Parent PLUS loans are those who can often least afford costly tuition prices and the difference left over after scholarships and financial aid are taken into account.
While Parent PLUS loans are eligible for some of the same forgiveness programs as other federal student loans, such as borrower defense to repayment, a Total and Permanent Disability (TPD) discharge, and Public Service Loan Forgiveness (PSLF), those programs have narrow and confusing eligibility requirements for borrowers.
At least part of the problem is the unfavorable terms of a Parent PLUS loan compared to other student loans offered by the federal government. As of July 1, PLUS loans had an interest rate of 6.28%, compared with 3.73% for Direct subsidized and unsubsidized loans for undergraduates. Additionally, PLUS loans have an origination fee quadruple that of federal student loans.
NASFAA has advocated for the elimination of all origination fees, which function more like a “hidden student loan tax.” The fees, NASFAA wrote in an issue brief, are a relic of bank-based student lending that increases complexity in the federal student loan system.
There is some conversation on the topic in Congress. To combat the disproportionate interest rates, Rep. Marcia Fudge (D-Ohio) in 2019 introduced a bill that called for capping the interest rates of Parent PLUS loans, allowing for income-based repayment plans to be used for the loans, and mandating counseling for all borrowers.
Sen. Chuck Grassley (R-Iowa) introduced a bill that would prohibit financial aid offices from including a PLUS loan amount on financial aid notifications. The bill states that federal PLUS loans can only be included as "additional funding options" on the award offer, and if the institution chooses to include them, it cannot include suggested borrowing amounts.
While neither bills have picked up much momentum in Congress, it underscores the desire for changes to come to these types of loans. What originally began as a student loan program to fill a funding gap for middle- and upper-income families has devolved into a problematic program that is exacerbating the racial wealth gap for Black families.
And the problems plaguing the program over the years have been well-documented. Numerous reports have identified issues and potential solutions, ranging from a lack of strict federal standards on the loans to the fact that there are no measures in place to hold institutions accountable who encourage parents to borrow beyond their means.
Additionally, the loan program is becoming increasingly less popular among borrowers. According to a recent survey conducted by The Harris Poll on behalf of NerdWallet, 1 in 3 with a federal Parent PLUS loan say they wouldn’t have taken out the loan if they could have a do-over. Of PLUS loan borrowers, 27% surveyed said they wish they had taken out a lower loan amount.
Advocates are hoping further investment in the federal Pell Grant program will help offset the need for low-income families to bridge the gap when it comes to being able to afford costly tuition bills.
Further, the possibility of tuition-free community college, which is currently in limbo in the halls of Congress, could help address the affordability gap that leads some parents to take out PLUS loans in the first place.
NASFAA offers several resources to help financial aid offices improve aid offers to ensure clear, concise, and accurate information is presented to both students and parents. NASFAA members also adhere to a code of conduct that guides aid offices work.
NASFAA also has a proposal for improving aid offers, including recommendations for standardized terminology and elements.
In the Higher Education Act reauthorization recommendations for Congress, NASFAA called for separating the Grad PLUS and Parent PLUS programs from each other, noting that the typical borrowing profiles of parents and graduate students are very different, yet they face the same credit standards under the loan program.
Additionally, the recommendation called for lowering the high interest rates the loan program has for parents and for graduate and professional students.
In a 2019 op-ed, NASFAA President and CEO Justin Draeger called on Congress to fix Parent PLUS loans by implementing underwriting standards that include a debt-to-income ratio.
“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,” the op-ed concluded.
Publication Date: 10/20/2021