June 2021

Higher Education at Any Cost: Parents’ Challenges with the Federal PLUS Loan Program

Acknowledgements

We would like to thank all those who generously shared their time and input on this project and our clients whose experiences animate our advocacy.

This project is supported by the Evelyn & Walter HAAS Jr. Fund. We are ever grateful to the partners whose support makes our work possible. The views expressed in this paper are solely those of HERA and do not necessarily reflect the views of our funders.

About HERA

Housing & Economic Rights Advocates (HERA) is a California statewide, not-for profit legal service and advocacy organization dedicated to helping Californians —particularly those most vulnerable—build a safe, sound financial future, free of discrimination and economic abuses, in all aspects of household financial concerns. We provide free legal services, consumer workshops, training for professionals and community organizing support, create innovative solutions and engage in policy work locally, statewide, and nationally. For more information on HERA, check us out at heraca.org.

About the Authors

Higher Education at Any Cost was written by Zoe Kemmerling, Staff Attorney at HERA, and Claire Torchiana, Equal Justice Works Fellow at HERA.

I. Introduction

The Parent PLUS (PLUS) loan program and families’ experiences with it reveal some of the ways in which the U.S. higher education financing system has gone awry, and particularly how a system supposedly designed to increase access to higher education instead entrenches and aggravates pre-existing inequities.1

A PLUS loan is a loan taken out by a student’s biological or adoptive parent to help pay the costs of the child’s education; the parent has sole legal responsibility for its repayment.2 As the price of tuition has skyrocketed, so have the number of parents taking out loans and their average debt load.3 The most common justification for student loan debt – that high debt burdens are justified by graduates’ increased earning potential – is inapplicable to parents who borrow to fund their child’s education.

This report examines PLUS loans through the lens of our clients’ stories and experiences, highlighting some of the major issues with PLUS loans through the life cycle of the loan. We begin with limited or missing initial information and disclosures about PLUS loans; then examine difficulties with repayment, including default; and follow by considering PLUS loans’ impact on retirement and wealth-building. The report ends with a set of recommendations to limit and improve the PLUS loan program.

Housing and Economic Rights Advocates (HERA) is a non-profit legal services organization that assists California consumers with debt and credit problems, including student loan debt. The HERA clients whose experiences inform this report are all low- to moderate-income parents living in California whose children attended North American higher education institutions of all types, including for-profits, and public and private non-profits.

Our clients’ experiences show that the PLUS program, which was initially designed to assist middle- and upper- income families,4 is being used by families across the income spectrum – with troublesome implications for financial security among low- and middle-income families. The Report concludes with a list of recommendations to reduce reliance on and improve the PLUS program.

1There is a second type of PLUS loan, the Graduate PLUS loan, which is available for graduate students. This type of PLUS loan is not addressed in this report. 2 See Parent PLUS Loans, Federal Student Aid, https://studentaid.gov/understand-aid/types/loans/plus/ parent (last visited May 11, 2021). 3 See Rachel Fishman, The Wealth Gap PLUS Debt: How Federal Loans Exacerbate Inequality for Black Families, New America (May 2018), at 27, https://www.newamerica.org/education-policy/reports/wealth-gap-plus-debt/; see also Adam Looney and Viven Lee, Parents are borrowing more and more to send their kids to college, and struggling to repay, Brookings (Nov. 27, 2018), at 2, https://www.brookings.edu/research/parents-are-borrowing- more-and-more-to-send-their-kids-to-college-and-many-are-struggling-to-repay/. 4 See Sandy Baum, Kristin Blagg, and Rachel Fishman, Reshaping Parent PLUS Loans, Urban Institute (April 2019), at 10, https://www.urban.org/sites/default/files/publication/100106/reshaping_parent_plus_loans.pdf.

1 A. Background

PLUS loans were created by Congress through the reauthorization of the Higher Education Act (HEA) in 1980.5 The program allows parents to take out federal student loans on behalf of their dependent children6 when the child has exhausted all other sources of financial assistance (loans, grants and scholarships).7 Parents may sometimes expect that their child will assist with repayment on the PLUS loan, though the loan is in the parent’s name.8 The interest rate for loans taken out since 2006 has hovered around 7 percent, higher than for undergraduate loans.9 There is no limit on borrowing – a parent can borrow up to the total cost of attendance, as determined by the institution. (In contrast, Direct Subsidized and Unsubsidized loans are capped at an aggregate limit of $31,000 to $57,500 for undergraduates, depending on the student’s status as a dependent or independent.)10

Generally, a parent borrower’s ability to repay the loan is not taken into account. Borrowers must undergo an “adverse credit history” check, which requires that a borrower not have a delinquent debt load over $2,085 and no history of default, bankruptcy, foreclosure, repossession, tax lien, wage garnishment, or write-off of a debt in the past five years.11 A parent can override a finding of adverse credit history by obtaining an endorser or showing extenuating circumstances.12 In 2011, the Department of Education (Department) instituted a tightened credit check, but this move was controversial because it disproportionately impacted families of color and suppressed attendance at historically Black colleges and universities (HBCUs) because families could not afford to enroll without access to PLUS loans.13 Indeed, “denials increased by 50% for parents of students at historically Black colleges and universities, costing the institutions about $50 million in enrollment revenue.”14

As with undergraduate federal student loans, PLUS loans generally are not dischargeable in bankruptcy, and the federal government can collect on defaulted loans through wage

5 20 U.S.C. §§ 1001 et seq. 6 Generally, a child is considered dependent if she is under the age of 24 and unmarried. There are certain exceptions. See Dependency Status, Federal Student Aid, https://studentaid.gov/apply-for-aid/fafsa/filling- out/dependency. 7 Student Loan Law, National Consumer Law Center (6th ed. 2019), at Chapter 1.4.1.2. 8 See Carla Fletcher, Jeff Webster, and Wenhua Di, PLUS Borrowing in Texas: Repayment Expectations, Experience, and Hindsight by Minority-Serving Institution Status (January 2020), at 23. 9 Parent PLUS loans, Federal Student Aid, https://studentaid.gov/understand-aid/types/loans/plus/parent (last visited June 7, 2021); Fishman, The Wealth Gap, supra, at 8. 10 Subsidized and Unsubsidized Loans, Federal Student Aid, https://studentaid.gov/understand- aid/types/loans/subsidized-unsubsidized (last visited May 11, 2021). 11 An adverse credit history means that the parent “(1) Has one or more debts with a total combined outstanding balance greater than $ 2,085, as may be adjusted by the Secretary in accordance with paragraphs (c)(2)(viii)(C) and (D) of this section, that are 90 or more days delinquent as of the date of the credit report, or that have been placed in collection or charged off, as defined in paragraph (c)(1) of this section, during the two years preceding the date of the credit report; or (2) Has been the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a debt under title IV of the Act during the five years preceding the date of the credit report.” 34 C.F.R. § 685.200(c)(2)(viii)(B). 12 34 C.F.R. § 685.200(c)(2)(viii)(A). 13 Student Loan Law, supra, at 1.4.1.2. 14 Id.

2 garnishments, federal benefit offsets, and tax-refund offsets. Only one income-driven repayment plan is available for PLUS loans. To access it, parents must first consolidate their loans, then enroll in the Income-Contingent Repayment (ICR) plan, which is the most expensive income- driven repayment plan.15

B. Repayment outcomes are worsening among PLUS borrowers

Despite the impact of PLUS loans on American parents and families, there is little public data available on PLUS loan outcomes. The Department does not regularly collect nor publish public data on the default rates for PLUS loans. Importantly, these defaults are not included in the cohort default rate (CDR) for institutions. A cohort default rate is the percentage of a school's borrowers who enter repayment on certain Federal Family Education Loan (FFEL) Program or William D. Ford Federal Direct Loan (Direct Loan) Program loans during a particular fiscal year, and default or meet other specified conditions prior to the end of the second following fiscal year. Schools with consistently high CDR rates can be sanctioned and have their access to federal aid terminated by the Department.16 Specifically, a school will be terminated from the federal aid program if the CDR equals or exceeds 25 percent for the three most recent fiscal years or if the most recent CDR is greater than 40 percent.17 Thus, schools that fear being sanctioned for their graduates’ poor repayment outcomes – disproportionately for-profit colleges – see PLUS loans as an attractive, consequence-free financing option.18

The limited data that has been collected on PLUS loans show that it is a program racked by many of the same pitfalls as the rest of our student loan system, and that outcomes are worsening. As of the end of 2020, there were approximately 3.6 million parents who borrowed PLUS loans, totaling almost $101 billion, which is around 6 percent of all outstanding federal loans and around a 40 percent increase from the amount borrowed since 2014.19 These numbers have been steadily rising over the past decade. Between 2014 and 2019, there was a 13 percent rise in the number of parents taking out PLUS loans.20 Loan amounts have also increased. Indeed, the average annual borrowing amount for parent borrowers more than tripled between 1990 and 2014, from $5,200 per year (adjusted for inflation) to $16,100.21 While only 0.4 percent of parent borrowers entering repayment on their last loan in 2000 owed more $100,000, as of 2018, 8.8

15 34 C.F.R. § 685.208(a)(2)(iv)(D). The ICR plan typically requires payments of 20 percent of one’s discretionary income, as opposed to 10% under the other available income driven repayment plan options, and payments are stretched out over 25 years, rather than 20 years as for most other income driven repayment plans. See 34 C.F.R. § 685.209. 16 34 C.F.R. § 668.16(m). 17 20 U.S.C. § 1085(a)(2); 34 C.F.R. § 668.187(a). 18 See Rachel Fishman, Finally. Parent PLUS Institutional Defaults Are Here, New America (Jan. 12 2021), https://www.newamerica.org/education-policy/edcentral/parent-plus-default/. 19 Fletcher et al., PLUS Borrowing in Texas, supra, at 12; Federal Student Loan Portfolio, Federal Student Aid, https://studentaid.gov/data-center/student/portfolio (last visited May 11, 2021); Tara Seigel Bernard, A Federal College Loan Program Can Trap Parents in Debt, New York Times (June 6, 2021), https://www.nytimes.com/2021/06/06/your-money/parent-plus-loans-debt.html. 20 Fletcher et al., PLUS Borrowing in Texas, supra, at 12. 21 Looney and Lee, Parents are borrowing more, supra, at 2.

3 percent of parents did.22 PLUS loan defaults have climbed correspondingly. Default rates rose from 7 to 11 percent between 1999 and 2009.23 Further data indicate that defaults on PLUS loans nearly tripled in the years leading up to 2014.24 The institutions with the worst repayment outcomes are for-profit colleges.25

Source: Tara Seigel Bernard, A Federal College Loan Program Can Trap Parents in Debt, New York Times (June 6, 2021), https://www.nytimes.com/2021/06/06/your-money/parent-plus-loans-debt.html.

PLUS loans were originally designed to increase access to higher education for middle- and upper-income families by assisting families in covering their expected family contribution (EFC).26 The EFC is an index number that college financial aid staff use to estimate how much financial support a prospective student should expect from her family, and thus how much financial aid to offer to fill the gap. Using information provided on a student’s Free Application for Federal Student Aid (FAFSA), financial aid administrators subtract a family’s EFC from the student’s cost of attendance to determine what type of and how much financial aid a student qualifies for. A family’s EFC is calculated according to formulae that consider whether the student is a dependent or independent; family income; whether the family receives means-tested federal benefits; household size, and family assets (e.g., investments, cash, and savings).27 Families who take out PLUS loans are more likely to be at the higher end of the income spectrum – that is, to have a higher EFC.28 However, as the cost of college has increased, so has the share of low- and middle-income families borrowing PLUS loans.29 Researchers estimate that, in fact, 62 percent of Parent PLUS borrowers in 2015-16 borrowed more than their EFC.30 Increasingly, parents are taking on debt loads that exceed the amount that college financial aid

22 Adam Looney and Constantine Yannelis, Borrowers with Large Balances: Rising Student Debt and Falling Repayment Rates, Brookings Institution (Feb. 2018) at 14, https://www.brookings.edu/wp- content/uploads/2018/02/es_20180216_looneylargebalances.pdf. 23 Fletcher et al., PLUS Borrowing in Texas, supra, at 13. 24 Student Loan Law, supra, at Chapter 1.4.1.2. 25 Looney and Lee, Parents are borrowing more, supra, at 2, 7. 26 Baum et al., Reshaping Parent PLUS Loans, supra, at 3-4. 27 See The EFC Formula 2021-2022, Federal Student Aid, https://fsapartners.ed.gov/sites/default/files/attachments/2020-08/2122EFCFormulaGuide.pdf. 28 Fishman, The Wealth Gap, supra, at 10 29 Baum et al., Reshaping Parent PLUS Loans, supra, at 4. 30 Id. at 7.

4 administrators expect them to reasonably contribute. The consequence is enormous PLUS debt loads that parents cannot afford to repay.

C. PLUS loans cement pre-existing structural inequities

Taken together with undergraduate loans, PLUS loans are creating a trend of intergenerational debt that cements and exacerbates existing structural disparities. Data indicate that the burdens of intergenerational PLUS loan debt fall hardest on low-income Black families.31 As a 2018 report by New America documented, low-income Black families are more likely to take on PLUS loan debt than low-income white families.32 Indeed, for Black families who take out PLUS loans, “about one in 10 have adjusted gross incomes (AGIs) over $110,001, with approximately one- third having an AGI of less than $30,000” while “approximately a third of white PLUS borrowers come from household AGIs of more than $110,001, with about one in 10 coming from families with AGIs less than $30,000.”33 Furthermore, “black families with zero EFC accumulated an average of $33,721 in intergenerational debt, of which $11,352 was in PLUS loans. By contrast, white families with zero EFC accumulated $25,434 in debt, 25 percent less.”34 This has profound and deeply troublesome implications. As explained by the report: “the federal government provides ‘access’ to higher education, via PLUS loans, to any college or university as long as a parent is approved. But if the parent is low-wealth, then a PLUS loan does not provide true access because it will ultimately result in harm and erasure of wealth when the bill is due.”35 This means that PLUS loans further erase wealth for Black families that have already faced systematic barriers to wealth-building in the labor and housing markets. A system of intergenerational debt locks families into a lifetime of debt and hampers the social mobility that higher education should facilitate.

PLUS loans can also create financial instability for the parents of first-generation college students (that is, parents who did not earn a college degree themselves). For parents who did not attend college, or did not attend college in the United States, our higher education financing system can be particularly inscrutable. Yet one 2017 study found that first-generation students were more likely to borrow and more likely to borrow more (and more from individual federal programs, including PLUS loans).36 First-generation college students are more likely to come from low-income families: on average, the expected family contribution of a first-generation student is about half that of a student with college-educated parents.37 A lack of experiential understanding of college financing only compounds the previously discussed pitfalls of PLUS educational financing for low- and moderate-income borrowers.

31 Fishman, The Wealth Gap, supra, at 13, 18. 32 Id.at 13. 33 Id. 34 Id. at 16. 35 Id. at 31. 36 Fernando Furquim, Kristen M. Glasener, Meghan Oster, Brian P. McCall, and Stephen L. Desjardins, Who Borrows and Why?: Navigating the Financial Aid Process: Borrowing Outcomes among First-Generation and Non- First-Generation Students, 671 Annals of the Amer. Acad. of Pol. & Soc. Sci. 69 (May 2017) at 71, 82. 37 Id. at 76.

5 II. The reality: how are borrowers experiencing PLUS loans?

A. Many parents are not informed of even the basic features of the loan before signing

Many parent borrowers are not familiar with the PLUS loan program before their child is accepted at a higher education institution. One study of parent borrowers in Texas found that nearly two-thirds of borrowers had heard about the PLUS loan program for the first time from the college’s financial aid office or from the FAFSA.38

This is notable in part because parent borrowers may be making incorrect assumptions about features like interest rates, deferments, and repayment options based on their generalized knowledge of other loan programs like Direct Subsidized and Unsubsidized loans – and they may not get an opportunity to have their assumptions corrected until it is too late. As described in Section I, the parameters of the PLUS loan program are less favorable in several ways: they come with higher interest rates and limited access to income-driven repayment options. There are also no automatic in-school deferment or grace periods-- unless a parent specifically requests a deferment, repayment begins as soon as the loan is disbursed.39

Of even more concern are the parents who were unaware of integral aspects about the PLUS loan program, such as the fact that it is the parent borrower’s sole responsibility to repay. Unlike Direct federal loans, there is no mandated entrance counseling for PLUS loans.40 Comprehensive research on what parent borrowers understand at the time they take out loans is lacking. However, anecdotal reports by HERA clients reveal that a basic lack of understanding of the time of signing is not an isolated occurrence.

1. A dearth of information

For parents introduced to the PLUS program by the school’s financial aid office, this information usually comes via the student’s financial aid award letter, a format which one report describes as “deliberately arcane and confusing.”41 A 2018 analysis of thousands of college financial aid award letters undertaken by New America and uAspire found a slew of pervasive and problematic norms, including lack of clarity regarding the complete cost of the degree, failure to differentiate between types of aid, and confusing terminology.42 One of the report’s key findings was that Parent PLUS loans were often misleadingly packaged: 15 percent of the letters reviewed characterized a Parent PLUS loan as an “award,” when in reality securing the loan requires a separate application and approval process.43 One example itemized a “Federal Direct PLUS

38 Fletcher et al., PLUS Borrowing in Texas, supra, at 20. 39 See Parent PLUS Loans, Federal Student Aid, https://studentaid.gov/understand-aid/types/loans/plus/parent#do-i- have-to-make-payments-on-my-loan-while-my-child-is-still-in-school (last visited June 8, 2021). 40 Fletcher et al., PLUS Borrowing in Texas, supra, at 16. 41 Fishman, The Wealth Gap, supra, at 15. 42 Stephen Burd et al., Decoding the Cost of College: The Case for Transparent Financial Aid Award Letters, New America and uAspire (June 2018), at 2, https://d1y8sb8igg2f8e.cloudfront.net/documents/Decoding_the_Cost_of_College_Final_6218.pdf. 43 Id. at 20.

6 loan” without specifying that it was a parent loan.44 Additionally, the survey of award letters found that among the 128 sampled award letters that included Parent PLUS loans, the loan was identified using one of 67 separate terms, including 12 that did not use the word “loan” at all.45

Many parents report feeling bewildered and confused by the process of taking out PLUS loans. “My daughter got a packet in the mail, and I was perplexed by the cost and how she would pay,” says Tamalin, a second-generation immigrant who had not gone to college herself. “I was so naïve. I knew college would be expensive, but I trusted the college.” Tamalin fell into a routine: every semester her daughter would get a notice that she had a balance due on her account. Tamalin would call the financial aid office, and they would tell her that her only option if her daughter wanted to enroll in classes for the following semester was to take out another PLUS loan. “I didn’t realize they broke it up in semesters,” said Tamalin, describing her lack of understanding of the initial award letter. She felt trapped and taken advantage of. “We should have been able to have a conversation beforehand so we’d know exactly how much it should cost. None of those conversations happened.” Furthermore, Tamalin had been told by various representatives at the financial aid office that the PLUS loans could be transferred to her daughter’s name when she graduated. Later, she found out that wasn’t the case.46

Similarly, Patricia felt like she had “no other choice” but to take out approximately $100,000 for her son’s attendance at the for-profit Academy of Art University. Each semester, the university administrators would tell her that her son would have to be pulled out of school if she did not sign up for PLUS loans. Patricia wanted him to continue and to get a college education, which she was not able to, so she agreed. On an annual income of $28,000, Patricia has no idea how she will afford to repay the loans and feels constant stress as a result.47

Another client, Antonia, took out PLUS loans for her daughter to attend Heald College, a for- profit school belonging to the now defunct Corinthian College chain. She explained, “to be honest, we didn’t understand much about what we were getting or signing up for. When we got our appointment with a financial advisor, she never explained that it was going to be multiple loans.” Antonia does not speak English and remembers being rushed through the process of signing up for loans. Antonia makes approximately $15,000 annually, and financially supports her family in the U.S. and her family in Mexico. She has not been able to afford to purchase a home or a car because of the loans’ impact on her credit.48 Antonia is in the process of applying to discharge her loans, but she is not sure how she will manage if the application is not granted.

Other borrowers believed that they were co-signing loans with their child. “Everything was rushed,” said Eva. “[The college] didn’t really provide information. I didn’t grow up in this country, so I’m not as familiar with how college and loans work.” Eva remembers being provided with some information and forms to sign online, but she doesn’t remember sitting down with anyone at the college’s financial aid office. She thought she was co-signing her son’s loans. Later, when she and her husband entered bankruptcy, she found out that the student loans

44 Id. 45 Id. at 19. 46 HERA telephone interview with Tamalin, Parent PLUS borrower (April 6, 2021). 47 HERA telephone interview with Patricia, Parent PLUS borrower (June 7, 2021). 48 HERA email correspondence with Antonia and her daughter, Karina (May 5, 2021).

7 couldn’t be discharged like her other debts. And only later still did she comprehend that the loans were solely in her name and would remain on her credit report as she attempted to rebuild her credit post-bankruptcy.49

Parents like Tamalin, Patricia, Antonia, and Eva borrow despite misgivings out of a determination to see their child through the degree. But obscuring the true costs of a four-year degree can also have the opposite effect: forcing students to drop out once they or their families reach a point where they’re unwilling or unable to take on more debt. Student who don’t complete their degree become at statistically greater risk of default on the loans they already have.50 Meanwhile, parents find themselves with enormous debt loads they cannot afford to repay, hampering their financial mobility and constricting their lives. For students and parents stuck in the middle of an unaffordable education, it’s a no-win situation.

2. Survey of college websites

Schools also share misleading or confusing information on PLUS loans through their marketing materials. In a snapshot survey of websites of local colleges and college chains with local branches, HERA found that institutions vary widely in how they present PLUS loan borrowing on their financial aid pages. We focused largely but not exclusively on private for-profit schools, long the source of the most problematic financial behavior.

Some schools present fairly comprehensive and accurate information. DeVry University lumps Parent and Graduate PLUS loans together under the heading “Federal PLUS Loans,” but provides a conspicuous link to an FSA brochure with more information.51 Academy of Art University describes Parent PLUS loans as “loans that are taken out by parents of dependent students that must be paid back” and also provides a summary of federal loan interest rates.52 Pacific Oaks College clearly indicates that PLUS loans are available to parents of undergraduate students and discloses the need for credit evaluation and the interest rate.53 William Jessup University lists “Direct PLUS Parent Loan” separately from other federal loans and includes a summary of its main features.54 Cogswell University of Silicon Valley has a similar presentation, including a statement that “[t]he parent is legally responsible for repayment of the loan.”55

Other college websites, however, include confusing or downright misleading information in their financial aid sections. Palo Alto University’s page on loans contains the following statement under “What is a federal student loan?”:

49 HERA telephone interview with Eva, Parent PLUS borrower (April 5, 2021). 50 See Burd et al., Decoding the Cost of College, supra at 7. 51 See How to Apply for Student Loans, DeVry University, https://www.devry.edu/tuition-financial-aid/financial- aid/loans.html (last visited May 5, 2021). 52 See Types of Financial Aid, Academy of Art University, https://www.academyart.edu/finances/types-of-financial- aid/ (last visited May 5, 2021). 53 See Loans, Pacific Oaks College, https://www.pacificoaks.edu/loans/ (last visited May 6, 2021). 54 See Undergraduate Financial Aid, William Jessup University, https://jessup.edu/financial- aid/undergrad/#1611277274338-9e6c7495-7387 (last visited May 6, 2021). 55 See Loan Programs, University of Silicon Valley, https://usv.edu/admission/loans (last visited May 6, 2021).

8 Federal loans are borrowed funds that must be repaid along with the interest that accrues. A federal loan allows the applicant and loan co-sign members to borrow money to help pay for college through federal government programs.56

What is misleading about this statement is that the majority of federal student loans cannot be cosigned. The exception is PLUS borrowers with poor credit, who may obtain a loan with their own “endorser.”57 In contrast to federal loans, many private student loans offer the option of a cosigner; thus, a family who has dipped into the private student loan market could easily assume that federal loans require cosigners as well. This may lead to the mistaken assumption, encountered among HERA clients like Eva, that a parent signatory is cosigning their child’s loan when they are in fact signing up for their own, additional loan.

In other instances, glossing over the differences between PLUS loans and other types of federal student lending may give the reader incomplete information. A University of Phoenix blog post purporting to offer a breakdown of loan types lumps graduate and parent loans under the heading of “Direct PLUS Loans.” Farther down, a section titled “If you can’t pay” includes a very general summary of deferment, forbearance, and various forgiveness options, not all of which are available to parent borrowers.58 One of the possible discharge options mentioned in the blog post is bankruptcy – although the standard for discharging student loans in bankruptcy is prohibitive and set above other types of debts.59 The opening summary of federal loan types on the webpage of the University of Arizona Global Campus (this non-profit college is the reincarnation of the notorious Ashford University, a legally troubled for-profit institution60) lists “Direct Subsidized/Unsubsidized Loan, Direct Graduate PLUS Loan, Direct PLUS Loans, Federal Pell Grants, Federal Supplemental Educational Opportunity Grants (SEOG), and the Federal Perkins Loan” – omitting the fact that the second type of PLUS loan is one taken out by parents.61

The Fashion Institute of Design and Merchandising offers information on Parent PLUS Loans that consists of a brief paragraph describing them as “[a]ffordable financing for parents and guardians” and “a federally guaranteed low interest loan.” The balance of the page is taken up by detailed steps on how to apply.62 Carrington College’s webpage on student loans is riddled with syntactic errors, non-functional links, and vague promises like “you can also work with your loan servicer to select a repayment plan.”63

56 See Loans, Palo Alto University, https://www.paloaltou.edu/admissions/admissions-resources/financial-aid-and- scholarships/loans (last visited May 5, 2021). 57 See Parent PLUS Loans, Federal Student Aid, https://studentaid.gov/understand- aid/types/loans/plus/parent#adverse-credit (last visited June 8, 2021). 58 See Loan language, University of Phoenix (April 28, 2020), https://www.phoenix.edu/blog/loan-language/. 59 Educational loans can only be discharged upon a finding by a court that repayment of the debt “will impose an undue hardship on the debtor and the debtor’s dependents.” Student Loan Law, supra, at Chapter 11.2.1. 60 See Lindsay McKenzie, University of Arizona’s Big Online Push, Inside Higher Ed (August 4, 2020), https://www.insidehighered.com/news/2020/08/04/university-arizona-acquires-ashford-university. 61 See Financial Aid and Title IV Programs, The University of Arizona Global Campus, https://www.uagc.edu/tuition-financial-aid/payment-options/financial-aid (last visited May 5, 2021). 62 See Parent (PLUS) Loan, FIDM, https://fidm.edu/en/admissions/financial+aid/federal+and+state+programs/ parent+plus+loan (last visited May 5, 2021). 63 See Student Loan Program, Carrington College, https://carrington.edu/financial-aid/student-loans/ (last visited May 5, 2021).

9

Such small omissions and elisions may seem like minor issues. But for the parent unfamiliar with higher education funding, clarity is necessary at every stage. Inconsistent messaging across institutional correspondence, web content, and official sources like the official Federal Student Aid government website will inevitably lead to confusion about what exactly the parent is being asked to sign.

B. Many parents feel backed into a corner, with no other choice

Aspiring college students receive competing acceptance and award letters at a critical juncture: they are making an important life decision that involves weighing multiple considerations. Which school will give them the best educational experience? The best career prospects? Is one of the schools their dream school? One of the most practical questions a low- or moderate- income student must face is whether the cost of attending a given college will be a reasonable investment, and whether the loan amount that they and/or their parents take out can feasibly be repaid. And yet, as noted above, there is no standardized format that schools must use to present this information, which can make comparing offers a baffling task.64

Parents often report feeling they had no other choice but to take out PLUS loans to help their child cover the cost of school. As the cost of college far outpaces the growth of wages, families across the board have had to take out increasing amounts in loans.65

Moderate-income HERA clients describe having nowhere else to turn besides PLUS loans when they discovered their children were facing high college costs and little financial aid. “We were just over the income cutoff for being able to get aid. We had to pay everything,” said Sunny. She remembers her two children submitting financial aid paperwork and then receiving an offer consisting largely of PLUS loans. She explained that with nowhere else to turn for financial advice, “it seemed like the only choice I had.”66

Lana is a single mom whose daughter’s father asked Lana to cover half of tuition. “I Googled different things,” said Lana. “I tried to get a loan from a bank, but that didn’t go anywhere.” When she signed up for PLUS loans, she had a sense of the terms and worried about affordability, but felt like she had no other choice. When her income took a hit due to the pandemic, only consolidating and applying for Income-Contingent Repayment helped put her mind at tenuous ease.67

“I’m a parent, and I want to help my daughter,” said Shirley. “I want her to have a good education and get a good job. But she can’t afford college, and I can’t afford it either. Everything is so expensive. It’s the Bay Area!” Shirley knew that Direct Subsidized Loans didn’t accrue

64 See Cost in Translation: How Financial Aid Award Letters Fall Short, The Institute for College Access and Success (December 2017), https://ticas.org/wp-content/uploads/legacy-files/pub_files/cost_in_translation.pdf. 65 See, e.g., Camilo Maldonado, Price Of College Increasing Almost 8 Times Faster Than Wages, Forbes (July 24, 2018), https://www.forbes.com/sites/camilomaldonado/2018/07/24/price-of-college-increasing-almost-8-times- faster-than-wages/. 66 HERA telephone interview with Sunny, Parent PLUS borrower (April 14, 2021). 67 HERA telephone interview with Lana, Parent PLUS borrower (April 15, 2021).

10 interest while the student was in school, and was caught by surprise when interest began accruing and payments came due on her PLUS loan almost immediately. She felt trapped by the 7% interest rate at a time when interest rates were at a low. “It’s not easy for students right now. And it’s hard for parents too.”68

Stacey, who took out approximately $30,000 in PLUS loans for her daughter’s Associates degree at Le Cordon Bleu, a for-profit cooking school, similarly remembers feeling like she had no other choice. She remembers the financial aid office presenting PLUS loans as her daughter’s only option. At the orientation, financial advisors signed her up for PLUS loans on the spot, explaining that if her credit wasn’t good enough for the PLUS loan, they would just move onto another family member such as a grandparent (though in fact PLUS loans are not available for grandparents). Stacey felt pressured, explaining: “you want your kids to go to college and have a career they love. I didn’t have that. What can you do? It’s really hard when you know that it’s your kid’s passion.” Ultimately, Stacey took out about three-fourths of the cost of school through PLUS loans.69 As discussed above, overreliance on PLUS loans is typical at for-profit colleges because PLUS loans are not included in the cohort default rate, making them an easy and consequence-free source of revenue for the schools.70 Although Stacey and her daughter agreed that her daughter would help her make payments, her daughter was never able to get a job in her field nor transfer her credits to another school, and is still living at home. Stacey can barely stay financially afloat while paying on the PLUS loans, and has told her youngest son she will not be able to take out PLUS loans for his education.71

C. The repercussions of PLUS borrowing are serious and long-lasting

1. Growing balances

As noted above, studies reveal a steep rise in the balances of PLUS loans being taken out by individual borrowers since 2000.72 PLUS debt loads inevitably mirror rising college costs, because, as discussed above, there is no true limit on PLUS borrowing. A PLUS loan can be as much as the full cost of attendance (as determined by the child’s school) minus any other financial assistance offered.73 This means PLUS loans can be treated as a potentially limitless resource of last (or first) resort.

It is common for parents to experience surprise over how much debt they end up with.74 A number of factors may contribute to the elusive nature of a borrower’s total balance, including origination fees, capitalized interest during periods of forbearance, and year-to-year increases in tuition and fees.

68 HERA telephone interview with Shirley, Parent PLUS borrower (April 15, 2021). 69 HERA telephone interview with Stacey, Parent PLUS borrower (April 29, 2021). 70 See Fishman, Finally. Parent PLUS Institutional Defaults Are Here, supra. 71 Telephone interview with Stacey, supra. 72 See Looney and Lee, Parents are borrowing more, supra, at 2; see also Looney and Yannelis, Borrowers with Large Balances, supra. 73 Parent PLUS Loans, Federal Student Aid, https://studentaid.gov/understand-aid/types/loans/plus/parent (last visited May 7, 2021). 74 See Fletcher et al., PLUS Borrowing in Texas, supra, at 22.

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This pattern has been borne out by HERA client experiences. After being drawn into the pattern of renewing her PLUS loans every semester, Tamalin watched her balance grow in shock until it reached nearly $150,000. “How can you so easily get loans of this caliber and this size?” she thought, “I don’t qualify for a home, or even for a credit card with such a high limit.”75

“We didn’t expect to spend so much money on the student loans,” said Sunny, who has almost $100,000 in PLUS loans for her two children. But when the time came for making a decision to borrow, “my kids wanted to go to college and I wanted them to go.”76 Shirley began repayment on a ten-year term, but couldn’t afford the monthly payments. She switched to an extended repayment plan, although she agonizes about how little of the principal balance she’s able to pay down under this plan.77

Another HERA client, Jeff, has a staggering balance of approximately $700,000 in PLUS loans for his two sons, who attended Brooks Institute, a for-profit college with a troublesome track record of fraud and misrepresentation. The balance has ballooned since he took out the loans a decade ago. Jeff has had to go into forbearance multiple times to avoid default, and the interest on his loans has capitalized – throwing his family into what he describes as a “debt trap” and a “conveyer belt into lifelong financial servitude.” Jeff took out the loans because he wanted to help his sons and he believes in the benefits of education, but they have had a devastating and crippling impact on his financial life. He cannot save for retirement, and he is unable to take out any personal loans or loans for his small business. He explains that the only saving grace has been the income-contingent repayment (ICR) plan.78

Unsurprisingly, a 2018 Brookings Institution study revealed that borrowers with large balances took longer to repay their loans; since 2010, there has also been a trend of balances increasing during repayment due to capitalized interest.79 This is an alarming pattern as borrowers head into retirement.

2. Paying into retirement

In many situations, rising debt dovetails with an already unstable retirement situation. A 2013 study found that half of middle-aged adults had $12,000 or less saved for retirement.80 A trend of shrinking retirement plans and falling retirement savings suggests that a rising proportion of older adults will be depending on Social Security as the bulk of their income. The seeds of disaster lurk in the fact that garnishment of Social Security benefits is one collection tool given to the federal government.81 Indeed, a Government Accountability Office report from 2015

75 Telephone interview with Tamalin, supra. 76 Telephone interview with Sunny, supra. 77 Telephone interview with Shirley, supra. 78 HERA telephone interview with Jeff, Parent PLUS borrower (April 8, 2021). 79 Looney and Yannelis, Borrowers with Large Balances, supra at 21. 80 See Katrina M. Walsemann and Jennifer A. Ailshire, Student Debt Spans Generations: Characteristics of Parents Who Borrow to Pay for Their Children’s College Education, 76 J Gerontol B Psychol Sci Soc Sci 1084, 1088 (2017). 81 See Id.; Fishman, The Wealth Gap, supra, at 25

12 estimated that 7,339 Parent PLUS borrowers ages 65 and older were in default and experiencing collections, a 219 percent increase over the number in 2005.82 The senior cohort is not a small one, and is unlikely to shrink. A 2019 Urban Institute report found that among parent borrowers who had not yet paid off their loans, 25 percent were age 60 and up while another 61 percent were 45 to 59.83

Here too, there are troublesome implications for the racial wealth gap and the disproportionate weight of intergenerational debt on Black families. For instance, half of Black employees versus two-thirds of white ones work for employers who sponsor a retirement plan, and one-third of single Black seniors count Social Security as their only source of income in retirement.84

PLUS loan debts hamstring families until retirement. As Jeff explained, his PLUS loan debt makes him feel he is “worth more dead than alive.”85 Rather than functioning as a key to economic mobility and fulfilling a student’s life aspirations, educational loans can turn into a family’s lifetime debt sentence.

Sunny is a schoolteacher who recently went on medical leave; she is wary of applying for the Public Service Loan Forgiveness program with its ten-year requirement if she’s not able to return to work.86 With the two PLUS loans she borrowed for her children accruing interest at 6.8 percent, a misstep among the strict requirements for federal forgiveness could result in an avalanche of debt as she attempts to settle into retirement.

Doug, another HERA client, has found himself with close to $60,000 in loans he took out for his daughter’s education. A retiree, he defaulted several years ago because he was unable to keep up with payments. Almost $300 is garnished from his Social Security check each month. Doug feels he has no real viable option to get out of default – even his monthly payments on an Income- Contingent Repayment plan ultimately would be about $200 more than the amount garnished each month because of the limited relief ICR plans allow.87

82 Fishman, The Wealth Gap, at 26. 83 Baum et al., Reshaping Parent PLUS Loans, at 9. 84 Fishman, The Wealth Gap, at 25–26. 85 Telephone interview with Jeff, supra. 86 Telephone interview with Sunny, supra. 87 See fn. 15 for the ICR formula.

13 III. HERA’s recommendations for lessening the financial burden on current and potential PLUS Borrowers

The PLUS loan program is mired with problems from initial disclosures through repayment. At the outset, insufficient information prevents parents from accurately understanding what they are signing up for. Second, the lack of limits on borrowing encourages potentially excessive and burdensome borrowing that can trap families into a lifetime of financial servitude. Third, as the cost of college rises, parents are taking out more and more debt that follows them well into retirement. Fourth, the structural racial wealth gap means that these problems tend to be even more insidious among families of color. Exploring the intersection of these factors has troublesome implications for social mobility and racial equity. Our financial aid system does not need to be designed this way. Below are some recommendations to reduce the burden of PLUS loans on families that both the federal government and the California Legislature should consider implementing.

A. Expand grants so that most economically vulnerable families don’t have to take out PLUS loans

PLUS loans have strayed from their original purpose, and disproportionately burden families who are already economically vulnerable. We encourage the California Legislature and Congress to increase grants to students so that parents do not have to resort to covering the costs of college.

B. Stronger ability to repay standard when determining PLUS loan borrowing amounts

Absent an overhaul that would eliminate PLUS loans, Congress should impose a stronger ability to repay standard so that families are not saddled with debt they cannot repay. Some examples of factors that could be considered include income, assets, monthly expenses, employment, and credit history, similarly to the ability-to-repay rule that applies to mortgage lenders.88 Parents are taking out increasingly large debt loads that they have no chance of repaying. This is not a fair or just substitute for increased aid to students. A stronger ability to repay standard should be coupled with increased aid – ideally primarily grants – to students so that low-income families and students of color and HBCUs are not disproportionally harmed, as they were by the 2011 tightened credit checks.

C. Increased transparency

1. The Department and the CA legislature should publish data on PLUS loans, including default rates

There is insufficient publicly available data about PLUS loan outcomes, both overall and by institution. This lack of data makes PLUS loans vulnerable to misuse by for-profit or other

88 See 12 CFR § 1026.43(c).

14 schools with poor repayment outcomes and shields such troubled institutions from scrutiny. Data should be collected and published on (1) how many families are taking out PLUS loans; (2) the total loan amounts taken out; (3) the income of families who take out PLUS loans; and (4) repayment outcomes. As to the fourth, the Department should include a cohort default rate calculation for PLUS loans by institution so that PLUS loans are no longer a “no-strings” attached source of revenue for schools.

2. There should be required disclosures and financial aid counseling when taking out the loan

Client stories repeatedly make it clear that there are insufficient disclosures provided to parents when they are considering taking out PLUS loans. Federal student aid is a confusing morass, and families do not receive sufficient information. Both California and the federal government should require basic disclosures on the terms of repayment, including that (1) PLUS loans are the parent’s sole responsibility and are not “co-signed” by the parent; (2) interest rates; (3) the consequences of default; (4) available repayment plans; and (5) available forgiveness options.

D. Loan relief options should be expanded for PLUS loans

1. Expanding income-driven repayment options

Income-Driven Repayment options for PLUS loans should be expanded. While some argue that this will increase borrowing among families who cannot repay,89 unfortunately, families who have borrowed PLUS loans are already unable to repay. It is incumbent on our government to recognize that families are already struggling with unmanageable debt, and that they need relief. Other Income-Driven Repayment options currently available for federal student borrowers that should be available for PLUS loans are Income-Based Repayment (IBR), Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE).90

2. Student tuition recovery funds should cover PLUS loans

States should also consider making student tuition recovery funds, such as the California Student Tuition Recovery Fund (STRF), available for parent PLUS borrowers. Many STRF funds, which reimburse students for the economic harm they experience as the result of for-profit school closures or the significant decline in the value of education, do not compensate parents who took out PLUS loans.91 Parents are also harmed financially by for-profit school closures or sub-par educational quality, especially when they expected their child to help them pay off the PLUS loan. A parent takes on debt load for the benefit of their child. The parent should also be compensated if these educational benefits do not accrue to the child because of closures or otherwise.

89 See, e.g., Baum et al., Reshaping Parent PLUS Loans, at 14-15. 90 Student Loan Law, supra, Chapter 3.3. 91 See, e.g., California’s Student Tuition Recovery Fund. Cal. Edu. Code § 94923. et. seq.

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