Parent PLUS has become a central part of America’s higher-education financing system; parents can borrow freely from the federal government – with no limit – to support their children’s education.
Some recent research* from the Brookings Institution offers illustrations of an out-of-control parental loan program with substantial unintended, negative consequences for parents e.g. rapidly rising parental debt levels, slower repayment rates, increasing delinquency/default rates, all with little benefit from the child’s potential increased earning power.
To add ‘injury to insult’ parent loans actually make money for the government. According to CBO taxpayers net 13 cents for every dollar disbursed, and parent loans are the only category of federal student loans to turn a profit.** This profitability is because parents pay higher interest rates (currently 7.6 percent) and are ineligible for several loan forgiveness programs that student borrowers can access.
Furthermore, in 2015, 18 percent of families receiving a Parent PLUS loan had an expected family contribution of zero. In other words, the federal government determines that hundreds of thousands of parents can contribute nothing to their children’s college education, and then turns around and gives those same families tens of thousands of dollars in high-interest loans.
- The federal government offers parents unlimited loans, with minimal credit checks and high interest rates, to pay for an asset from which borrowers derive no direct benefit.
- If parents fall into default, the government has the power to garnish their wages and seize their tax refunds, charging excessive collection fees (up to 20%)
- Financial aid award letters sometimes do not even make it clear to families that Parent PLUS loans are loans.
If any entity but the federal government were making loans on these terms, it would be labeled a predatory lender and incur the full wrath of regulators at every level of government. But because ED is the lender, supported by Congressional action, these predatory practices get a pass.
As the HEA Reauthorization receives consideration now may be a time for FAAs and others offer a more viable alternative that provides access without burdening parents.
James Gathard, Principal
National Consulting Services, LLC