This blog post is the second part in a series that takes a look at recent changes to the credit criteria for Parent PLUS loans and the subsequent effect on historically black colleges and universities. You can find the introductory post here.
Last Tuesday, the Congressional Black Caucus met with President Obama and reportedly the first agenda item was the change to the Parent PLUS loan that has resulted in widespread denials. “We believe the criteria ought to be more lenient,” said Representative Jim Clyburn (D-S.C.), “If you have 100,000 students and families that can’t get Parent PLUS loans, that’s a problem for us.” While much of the public conversation around PLUS loans has been the result of vocal HBCUs talking about how the changes have hurt not only their students but their bottom lines, there’s been no consideration given to how changing the credit screen for PLUS loans protected parents from taking on high-interest, non-dischargeable, unlimited debt they cannot afford.
But what if institutions are not just protesting the tighter credit criteria because of its effect on their bottom line, but also because excessive reliance on these expensive debts is a way to evade meaningful federal accountability? At a public Education Department hearing recently held in Atlanta, there's evidence that some colleges and universities might be steering students away from other, better federal student loans and toward Parent PLUS to avoid penalties associated with high student loan default rates. According to testimony from Everette Freeman, the president of Albany State University, an HBCU in Georgia:
Now the federal Parent PLUS loan has at least one feature that helps students and at the same time it hurts students. A student who is denied a federal Parent PLUS is able to apply for a federal Stafford loan. The federal Stafford loan program, if it is not repaid, has a direct and negative impact on the institution’s ability to draw down federal funding. (Emphasis added.)
He’s right. When a parent is rejected for a Parent PLUS loan, students are allowed to borrow an additional $4-$5,000 in Stafford loans to make up the difference. Since Stafford loans are included in the official federal default rate and Parent PLUS loans are not, if students from a particular institution default at high rates, the institutions face penalties. The Cohort Default Rate (CDR) holds institutions accountable for whether their students default on their loans within three years of leaving college and entering repayment. A CDR of 30 percent or more comes with various sanctions including losing eligibility for Title IV financial aid funds. This would be a huge blow since federal student aid is the lifeblood for many colleges and universities.
But it was what President Freeman said next that was truly alarming:
Our institutions as a group have been trying to move away from Stafford loans, to the degree that we have been able to. And with the changes that were wrought last year, that has allowed us, unfortunately, prompted us to increase the number of applications for Stafford loans. We are worried about this.
If that statement doesn’t make you nervous, it should. It suggests that institutions are skirting accountability meant to protect students, families, and taxpayers.
President Freeman’s conclusion illustrates this point exactly:
We know that the federal government monitors our default rate. We certainly monitor our default rate, and this is one of those canaries in the mines, that if we do not return to provisions that allow for a credit formula that makes sense, we will, indeed, find an increase in the Stafford loan and the corresponding negative impacts that defaults will create.
But what he neglects to mention is that while shifting the debt burden onto parents through PLUS loans is easy for the institution, it may not be easy for struggling parents who are unable to discharge PLUS loans through bankruptcy.
What he also neglects to mention is that shifting debt from Stafford to Parent PLUS loans is costly for families. If a student borrowed the full amount of Unsubsidized Stafford loans available to him over four years for a bachelor’s degree, he would borrow $27,000. Under the standard 10-year repayment plan, that equates to approximately $323 per month, or $38,725 total. But under PLUS loans, that same debt would cost approximately $387 a month, or $46,468 total. So the parent would have to pay nearly 20 percent more for the same debt—an extra $64 more per month and more than $8,000 more over the lifetime of the loan. Not only that, but struggling parents would not be able to take advantage of the income-based repayment plans that the student would have qualified for with a Stafford loan.
Colleges and universities are using Parent PLUS loans like their own slush fund because there’s no reason not to. If you were a university facing tough economic times while trying to remain competitive and attract students, you would jump at the chance to get ahold of a nearly no-strings-attached source of revenue. But at the end of the day, parents are the ones on the hook for these loans. For this reason, at minimum, the Education Department should publish PLUS loan default rates by institution and close any loopholes that would discourage the use of cheaper Stafford loans by colleges and universities. Protecting families should come first and foremost when making changes to federal student aid—that’s why the Department of Education was right to make the changes it did to the PLUS credit check, and that’s why the Department must do more as it considers future changes to the program.
Stay tuned to Higher Ed Watch for the continuing coverage of the Parent PLUS loan crisis at HBCUs.
Thanks to Clare McCann for calculating the total amount repaid in Stafford and PLUS.