Monica Cabral is coming around to the idea that she will be in debt until she dies.
A single parent, Ms. Cabral took out about a $10,000 federal Parent PLUS loan in the early 2000s, when her son needed help paying his college tuition. Still paying off her own student loans, she had all her loans consolidated to make the payments easier to manage. But Ms. Cabral, 67, was recently laid off and is buckling under what she calls “astronomical” interest rates.
Ms. Cabral suspects that she will never be able to pay off her loans, and that her debts will fall on her son. But he graduated from college, and that, she says, is the most important thing.
“I may go into poverty. I may end up on the street,” she says. “But I did something for my child so that would not happen to him, and that is the plus.”
The U.S. Department of Education had the financial well-being of parents like Ms. Cabral in mind when it stiffened the credit requirements for PLUS loans in 2011, seeking to reduce the debt burden on borrowers.
Created to assist parents of low-income students who cannot pay for college through other forms of student aid alone, the program is meant as a last resort, making the department’s wave of surprise rejections that resulted from the rules change all the more devastating. Students, most visibly at historically black colleges, were forced to scramble for additional sources of aid.
Education Secretary Arne Duncan apologized for the department’s handling of the change, and the department added PLUS loans to the slate of topics up for discussion in negotiated rule-making sessions this year.
The debate sparked by the change and subsequent protest, also the subject of a panel to be held on Wednesday by the New America Foundation, speaks to the hard task before the Education Department: how to protect parents who might be unaware of the financial risk involved, but may be eager to support their children through any means available, no matter how potentially disastrous.
‘A Huge Problem’
Even though student-loan debt dominates the conversation swirling around higher education, debt incurred by parents as a result of PLUS loans has drawn little attention, perhaps because so little is known about it. The Education Department does not publish PLUS-loan default rates, as it does for student loans annually, and it has said it does not even track them. One statistic is available: The department gave out $10.6-billion in PLUS loans in 2011.
“If it does turn out that we’re lending all this money but that the default rates aren’t that bad, then there’s no problem with the program,” said Rachel Fishman, a policy analyst for the education-policy program at the New America Foundation, a research and advocacy organization. “But if it turns out that the default rates are 30 percent, that’s a huge problem,” Ms. Fishman added.
On its face, the PLUS loan is less consumer-friendly than are other forms of student aid, said Persis Yu, a staff attorney at the National Consumer Law Center, another advocacy group. For example, borrowers are not eligible for income-based repayment as student borrowers are with other forms of federal aid. Ms. Yu said many borrowers she has dealt with are largely uninformed about such crucial details.
Many people may be unaware that a PLUS loan carries with it “draconian consequences if a borrower fails to repay that loan,” Ms. Yu said, noting that delinquent borrowers may have their wages garnished, among other measures.
Some extra consumer protection is in order, Ms. Yu said. But the way the Education Department gauges a parent’s ability to pay—by his or her credit history—may not be an effective measure.
What the department needs is an “ability-to-pay metric,” Ms. Fishman said, that does not unfairly deny loans to parents who do not meet the credit requirements but would probably be able to pay off PLUS loans. A report released on Wednesday by the New America Foundation outlines possible reforms of the PLUS-loan program, which include adding a consideration of the borrower’s indebtedness relative to his or her earnings to the credit check.
The effects of the department’s reliance on credit history swing both ways. Families with no credit history “would be considered fine under this metric,” Ms. Fishman said, adding that “you would basically be giving an unlimited loan to someone with no credit history.”
The foundation’s report suggests other reforms as alternatives to a new metric. For instance, the department could cap the amount of money a parent could borrow through the PLUS program, which currently extends to a college’s full cost of attendance, the report states.
More radically, the report says, the department could end the PLUS program altogether. Labeling the program “a public-policy paradox,” the report says the federal government “should not be in the business of extending credit to affluent parents who could be served by the private market,” nor to those who assume the greatest risk, “low-income parents as a de facto extension of the student-loan program.”
Out of Luck?
Students who benefit from PLUS loans enroll disproportionately at for-profit and historically black colleges and universities. With their children short on aid, newly ineligible parents are scrambling to reapply for aid from the PLUS program.
But the number of parents who will be accepted back into the program will inevitably be smaller than those who initially applied, and that means less money for needy students, said David J. Wilson, president of Morgan State University, a historically black institution in Baltimore.
As state financing for higher education drops nationwide and federal funding remains tenuous, students who have exhausted all other avenues of student aid are out of luck, Mr. Wilson said. “When you basically have nothing, and the cost of education is not decreasing,” those students “have to get the resources from some place,” he said.
Mr. Wilson, who said his own father had taken out a loan to help him become the first member of his family to graduate from college, said parents should be able to decide for themselves whether a PLUS loan was in their best interest. “How can you stand in the way of the desire on the part of parents to take out a loan and to invest that money in their child’s future?” he added.
But critics say more measures should exist to keep low-income parents from driving themselves into debt for their children’s sake—since the children might end up footing the bill. “If you’re just putting students and families into generational debt, you have to think about what’s best for the family at the end of the day,” Ms. Fishman said.
The controversy surrounding PLUS loans might represent a challenge to a fundamental idea ingrained in American higher education: that every student should be able to attend the college of his or her choice. “Should you have access to the college of your dreams if it’s going to put your family into an incredible amount of debt?” Ms. Fishman said.
Even as she struggles to pay off her debt, Ms. Cabral rejects the notion that there should be greater restrictions on which parents may take out PLUS loans.
The most vulnerable families need help to give their children hope for a better future, she says, and the federal government should provide that help. “It was and it is a big sacrifice for me,” she says. “But I’ll tell you that I am happy and glad that I did it. I’m very proud of my son.”