Parent PLUS Loan Packaging Comes Under Scrutiny
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
Antonio H | 10/22/2021 9:50:50 AM
I have worked in financial aid for many years, and I have never advocated for including the Plus loan on an award letter until it is approved. Those of you who have worked in financial aid for at least 15 years may recall the complaint that was brought against the U.S. Department of Education by a group of schools that insisted that the Plus loan approval process was discriminatory and changes were made so that more parents would qualify for the loan. The irony is that the changes that were made to make more parents eligible for the loan are now problematic because the parents can't repay the loans.
Ben R | 10/22/2021 8:13:30 AM
Just as the old adage goes "only borrow what you can afford to repay", the new one should be "only lend that which you know can be repaid".
Kimberly L | 10/20/2021 12:25:42 PM
I have been in financial aid for over 30 years and have worked at three different schools. It has been my experience, that borrowing is often a symptom of a problem(s). I firmly believe that college planning and financial literacy, should be a mandatory subject beginning in ninth grade. Too often, I run into parents and students who have assumed that financial aid (no loans) will pay for everything. I can still see the many faces of parents and students who are reluctant to even come out of pocket on school books, however, they have spent a considerable amount of money on cars, proms, vacations, etc. In addition, I am shocked at how many parents and students do not read the webpages of schools where they are applying, or worse yet, are already attending. Some have no idea of the tuition cost or other expenses, even though the figures are on the college web pages. I hope in my lifetime, we see an overhaul of how financial aid is marketed. Let's just incorporate it into financial literacy courses.
Ellen C | 10/20/2021 12:5:03 PM
Given the legislative parameters and requirements placed on schools to not deny parents' the right to borrow, I think this program has done exactly what it was intended to do--that was probably a mistake, but it is being implemented as the Congress designed it.
Aesha E | 10/20/2021 11:45:45 AM
There are many concerns about PLUS loans, and I'm not sure the best way to fix them, if we're not going to get rid of them by increasing federal grants and/or first-dollar free college of some sort. However, credit score is definitely not one of them; they're far too biased. In order to fix PLUS loans there needs to be a way for low-income folks to be able to afford college. Is that loans? Is that schools putting more money money into need-based aid than they do merit-based?
James C | 10/20/2021 8:34:06 AM
Eligibility for PLUS loans should be tightened and based on credit scores and debt to income ratios. Also repayment and default rates on Parent PLUS loans should be public. GradPlus loans should have no debt to income test. We all see families with 0 EFCs borrowing up to the cost of attendance. Parent PLUS loans should be capped at $4,000 per year for first and second year students and $5,000 per year for third and fourth year students--equal to the additional unsub independent students receive.
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