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Parent Plus Loans Report 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.
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