One of the thorniest ways that a family can pay for college is through the use of federal Parent PLUS loans. The Parent PLUS loan program provides unsubsidized loans to any parent on behalf of their child up to the cost of attending college (including living expenses) and after accounting for all other student aid. The student must be a dependent and enrolled at least half time in college. Additionally, parents have to pass a credit check in order to qualify for a loan; if they have had any outstanding debts in the past 90 days or delinquent accounts within the past 5 years, the government will not furnish the loan.
What distinguishes Parent PLUS loans from other federal loans is that interest rates are higher than on undergraduate student loans (6.41 percent versus 3.86 percent); payments begin immediately after funds are disbursed; and parents have a limited set of repayment options (usually just standard, extended, or graduated). And just like other federal loans, they are nearly impossible to discharge in bankruptcy. Unlike co-signing on a student loan, where parents may be on the hook if the student falters in their payments, Parent PLUS loans are a debt incurred strictly by parents.
Despite their less-than-ideal terms, PLUS loans have become an increasingly popular financial tool as college tuitions soared and college financial aid packages failed to keep pace. At the program’s peak in 2011, there were just shy of a million borrowers and $11 billion in disbursements. The downside to the growth in PLUS loans is that some families have borrowed more than they can repay. In fact, there has been a steady uptick in the rate of parents defaulting on their PLUS loans (from 1.8 percent of borrowers in 2006 to 4.1 percent in 2010), especially in the for-profit sector where 11.8 percent of parents who borrowed in 2010 had defaulted by 2013.
Underwriting criteria for Parent PLUS were tightened in 2011, “denying student loans to disproportionately large numbers of black parents because of blemished credit histories”.
… When ED made the definition of credit-worthy more stringent, more parents were denied PLUS loans. Recently released figures from ED show that 40 percent of parents who had their credit histories checked were declined in 2013-14, up from 22 percent in 2010-2011. Without parent loans to bridge the financial gap between what families can pay out of pocket and the cost of attendance, enrollments at many institutions dropped. In turn, the drop in tuition revenue forced affected colleges to consider cost-cutting measures like reducing staff to make ends meet. The uproar swelled to a national crescendo, causing ED Secretary Arne Duncan to issue an apology to families for not being transparent enough about cutting off the large supply of federal funds.
Given the tightening in underwriting criteria, data from more recent years will likely show a lower percentage of Parent PLUS loans from lower income families.
Of families who took parent PLUS loans in 2011-12, 42% are in bottom half of income distribution.