• October 25, 2014

The Federal Parent Rip-Off Loan

The Federal Parent Rip-Off Loan 1

Michael Morgenstern for The Chronicle

If your business depends on poor people with bad credit borrowing money at high interest rates in order to pay you, what kind of business are you really in? That question is at the heart of a growing controversy over Parent PLUS loans.

The Parent PLUS program is run by the federal government. If students have already received Pell Grants and borrowed the maximum allowable amounts from Stafford and Perkins loans, and that's still not enough to pay for college, their parents can borrow additional money from Parent PLUS to make up the difference. Unlike many other federal loan programs, there's no hard limit on Parent PLUS debt—parents can borrow up to the full "cost of attendance," which is determined by colleges themselves and includes room, board, and living expenses along with tuition and fees.

Any parents can take out a Parent PLUS loan, even if they're unemployed and otherwise in debt, as long as they have a decent credit history. Recently the U.S. Department of Education tightened those credit requirements somewhat, to disqualify parents who have had unpaid accounts in collection or other student loans written off as unpayable over the previous five years.

The results were significant. The proportion of Parent PLUS applications denied because of bad credit increased from 28 percent to 38 percent in a single year. Over all, some 400,000 applications were denied. And while most of them were not parents with children attending historically black colleges and universities, those HBCUs were disproportionately hit.

Without Parent PLUS loans, enrollment dropped, and revenues quickly followed. Morehouse College was forced to furlough faculty and staff members. Clark Atlanta University saw its loan-denial rate increase from 25 percent to 65 percent and enrollment fall by 334 students. North Carolina Central University reported 609 Parent PLUS denials, Howard University 607, Florida A&M University 569.

HBCU leaders have responded with alarm. The president of Stillman College described the policy change as a "disaster for HBCUs." U.S. Rep. Corrine Brown, a Democrat from Florida and a member of the Congressional Black Caucus, called it "devastating." The Thurgood Marshall College Fund has threatened to sue the government.

The debate highlights the deep problem with referring to grants and loans under the umbrella term "financial aid." Pell Grants are financial aid. So are scholarships. Both reduce the amount of money that students and parents have to pay for college. Loans are different—you have to pay them back, with interest. Federal loan programs are "aid" only when they reduce interest rates below market rates or give people access to credit that wouldn't otherwise be available. Even then they don't cut the price of tuition by a dime. When the Honda dealer offers me easy credit on a new Civic, I understand that he's not trying to give me "aid." He's trying to sell me a car.

Many colleges include Parent PLUS loans as line items on confusing financial-aid "package" letters, as if the loans were just another good thing being offered to the applicant's family. They're not. Parent PLUS loans are the worst federal loans out there. They come at a high interest rate, 7.9 percent, which is closer to 9.0 percent after accounting for origination fees. Unlike student loans, they can't be deferred after graduation. Nor can parents use the federal income-based repayment program, which limits loan payments to 10 percent of income and forgives remaining debt after 20 years.

Like all college loans, Parent PLUS debt is all but undischargeable in bankruptcy, putting parents' retirement savings and Social Security benefits at risk of seizure in cases of default. From 2000 to 2011, annual Parent PLUS disbursements increased by 145 percent, after adjusting for inflation. Having created a new class of student debtors, higher education is now reaching back in time to indenture the preceding generation.

The parents at the heart of the current controversy are, by definition, people who don't have enough money to pay for their children's education out of pocket, can't get credit in the private market, and have had trouble paying off debts in the past. How likely are they to be able to repay college loans that can run into tens of thousands of dollars? If too many students from a given college default on their loans, colleges are thrown out of the federal financial program. But Parent PLUS defaults don't count in that calculation.

These are parents who want to do right by their children. But while saddling them with debt may be good for colleges, HBCUs and non-HBCUs alike, it can be disastrous for families. Just because some parents may be willing to ruin their financial future on behalf of their children doesn't mean we should let them.

More broadly, the Parent PLUS debate is symptomatic of a larger crisis among underresourced colleges that serve large numbers of low-income students. This is, again, not a problem specific to HBCUs. Whole sectors of higher education, particularly private colleges that depend heavily on tuition revenue, have been swept along by a 30-year wave of price increases.

Colleges have made do by setting tuition at high levels and then giving many students large discounts—what economists call "price discrimination," in which you maximize revenue by charging each customer the most he or she is willing to pay. The problem with price discrimination is that eventually you've priced perfectly, and there's no more additional revenue to be found. That time appears to be now: A recent report from the National Association of College and University Business Officers found that even as tuition discounts reach unprecedented highs, many small colleges are failing to reap more students or revenue in return.

As a result, colleges with little money can be among the most expensive places for low-income students to enroll. According to recently released data from the Department of Education, over 100 private colleges currently charge low-income students—those from families earning less than $30,000 annually—more than $20,000 in net tuition and fees, after subtracting Pell Grants, scholarships, tuition discounts, and other forms of aid. That means some low-income families are paying—or, far more likely, borrowing—more money for college than they earn in a year.

In the short run, states need to ensure that community colleges and public universities have enough available spaces and classes to enroll low-income students who can't borrow enough to attend expensive colleges. In the long run, state and federal governments should together develop a comprehensive rescue-and-investment plan for the nation's struggling colleges, particularly those with a mission to serve first-generation and minority students.

Those institutions have missions and traditions woven deep into the fabric of American learning. They have been left to struggle in the financial wilderness, with some of the most vulnerable being snapped up by for-profit colleges and used for their accreditation status like so many tear-down houses. The government should provide more financial aid, both to students and directly to institutions, for colleges that serve a high percentage of low-income students, in exchange for a commitment to meeting high standards of academic excellence.

We need basic structural changes in the way such colleges are financed, not a few more years of financial Band-Aids, paid for through the indebtedness of people who can least afford to borrow.

Kevin Carey is director of the education-policy program at the New America Foundation.

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