A Plan to Relax PLUS-Loan Restrictions Spurs a Debate on Default

August 08, 2014

Borrowers with a history of credit problems may have an easier time qualifying for PLUS loans under proposed rules set to be published on Friday.

Supporters say the new rules would expand access to college for low-income students, but skeptics worry the rules could saddle poor borrowers with unmanageable debt, driving up defaults.

The draft rules, which hew closely to a compromise crafted by negotiators this past spring, would loosen the Education Department’s underwriting criteria, making an estimated 370,000 more parents and graduate students eligible for the loans.

The plan is good news for historically black colleges and universities, which were hit hard by changes in the criteria that the department made in 2011. After the department tightened its standards, denial rates on PLUS loans spiked, and some of the institutions saw sharp drops in enrollment.

Under pressure from HBCUs, the department announced last year that it would revisit the changes as part of a negotiated rule-making process. The rule-making panel wrapped up its work in May, with a tentative agreement to ease the rules.

While HBCUs couldn't persuade the department to revert to its old rules, they won several of the concessions they had sought in the proposal. The United Negro College Fund, known as UNCF, which was represented on the panel, said the changes would provide relief to thousands of families that were denied loans under the existing standard.

"This will get students back onto campuses and back into classrooms," said Cheryl Smith, the fund’s senior vice president for public policy and government affairs.

But some advocates for historically black colleges said the fix, which would take effect in 2015, was "too little, too late." They want the department to apply its old standard to parents who have been denied PLUS loans since 2011. "I don’t want to sound like an ingrate, but what do you do for the students who have already been impacted?" asked Johnny C. Taylor Jr., chief executive of the Thurgood Marshall College Fund. "What do you say to those students?"

Good Stewards

Consumer advocates, meanwhile, said they were deeply concerned about what a softer standard would mean for future students and borrowers.

They warned that looser requirements could burden borrowers with debt they couldn’t afford, setting them up for default. Unlike Stafford loans for students, PLUS loans come with no annual or aggregate loan limits, meaning that parents and graduate students can borrow up to the full cost of attendance. The loans carry higher interest rates than Stafford loans, and they are not eligible for income-driven repayment plans.

Under the department's proposed changes, parents and graduate students whose previous defaults are sufficiently old, or whose debts in delinquency are sufficiently small, would no longer be denied PLUS loans. In the 2012-13 academic year, 1.1 million loan applicants were turned down. The department estimates that one-third of them would have qualified under its proposed new standard.

Parents made up the bulk of the denials, though thousands of graduate students were turned down, too.

In a written statement, Education Secretary Arne Duncan said the changes would "allow us to continue to be good stewards of taxpayer dollars and open the doors of college to ensure all students have the opportunity to walk through them."

Benefit or Burden?

But consumer advocates said that if the government intended to offer more PLUS loans, it needed to do more to ensure that it was lending to borrowers who could afford to repay them. The advocates want Congress to add a test of parent borrowers’ ability to repay loans to its existing credit check.

"Access to education is extremely important, but we don’t want to systematically saddle entire families with huge debts that could take decades to pay off," said Suzanne Martindale, a staff lawyer with Consumers Union and a member of the negotiating panel. "Parents aren't the ones getting the boost from receiving the education, so we need to make sure at the outset that they're not borrowing more than they can actually afford."

One impediment is that there’s not a great deal of public data on PLUS-loan default rates. Ms. Martindale is one of a number of advocates and policy analysts who have called on Congress to require the department to publish cohort default rates for Parent PLUS loans and to hold institutions accountable for those rates. One suggestion, from Rachel Fishman, a policy analyst with the New America Foundation: penalizing colleges with rates over 30 percent, in line with the existing standard for student loans.

The department released default rates for Parent PLUS loans for the first time in March. Though the rate has tripled in recent years, to 5.1 percent, it remains well below the rate for Stafford loans. For PLUS loans to graduate students, the rate is 1 percent.

In the proposed new rules, which will be published on Friday in the Federal Register, the department mentioned a few steps it will take to combat defaults. It plans to collect—"and where appropriate publish"—information about the performance of PLUS loans, including default rates. And it will offer voluntary entrance counseling to Parent-PLUS borrowers and create a calculator to help them assess their ability to repay the loans.