The Problem with Parent PLUS Loans

Moocs-and-digital-higher-educationIt’s no secret that funding trends in higher education in our state and across the nation are making it harder for low- and middle-income students to go to college, and nearly impossible for them to do so without going into debt.

Twenty years ago, only 47% of students graduated with loans, and their average debt was $9,450. For the class of 2012, average debt was $29,400 for the 71% who graduated with loans.

It is not safe to assume that all student debt is of the ‘good,’ federal variety. It’s true that federal Stafford Loans are relatively protective of borrowers, but those loans are limited to $5,500 to $7,500 a year, depending on the student’s year in college. With tuition at the University of Washington nearing $13,000 a year (and other four-year institutions not far behind), most Washington students simply can’t cover the cost of college without more help.

So where do they turn? To private loans and federal Parent PLUS Loans, which are much riskier for student and parent borrowers alike.

Private student loans, which make up about 20% of student borrowing, have a bad rap for good reason.  But Parent PLUS Loans often fly under the radar in discussions about fixing the higher education debt crisis.

Despite their relatively positive reputation, PLUS Loans warrant careful consideration. Not only do they charge higher interest rates than Stafford Loans, the principal of a Parent PLUS Loan is limited only by the cost of attendance – as determined by the college or university. This scheme allows institutions to continue to raise tuition, with the assurance that parent borrowers will take out loans up to the maximum to pay their son’s or daughter’s tuition and living costs.

Moreover, parents’ eligibility for PLUS Loans is determined by a simple credit check, with no determination of income, employment status, or ability to repay the loan, which results in many parent borrowers becoming overburdened and going into default. What’s even more problematic, Parent PLUS loans are not eligible for the major income-based repayment plans available for Stafford Loans.

The Department of Education doesn’t keep statistics on default rates for PLUS loans, but it estimates that about 9.4% of PLUS loans originating in 2011 will default over the next 20 years, only 0.6% less than the average default rate for Federal Stafford Loans from the same year. Even though many students agree with their parents to pay off their parents’ loan themselves, there is no way for a parent to legally assign the debt to their son or daughter after college.

To put it simply, PLUS Loans are not a safe bet for parents.

Some have argued that our government already spends enough money on higher education to make it free for almost everybody, if the money were used in more efficient ways. Others, including EOI, have urged innovative solutions, like Pay It Forward, to help low- and middle-income students and their families access college while we work with and wait for our state and federal lawmakers to reinvest in higher education.

If perilous Parent PLUS Loans are the best alternative to private student loan debt that we can offer our students and their parents to pay for college, we have to do better.

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