Posts tagged ‘Parent Plus Loan’

July 8, 2015

Should Parent PLUS loans generate billions in profits?

by Grace

The US government’s predatory-lending program
America earns $3 billion a year charging strapped college parents above-market interest. “It’s like ‘The Sopranos,’ except it’s the government.”

The fast-growing federal program known as Parent PLUS now serves 3.2 million borrowers, who have racked up $65 billion in debt helping their kids go to school. The loans have much in common with the regular student loans that have created a national debt crisis and a 2016 campaign issue, but PLUS has much higher interest rates and fees, and far fewer opportunities for loan forgiveness or reductions.

Should student loans generate profits for the federal government?

In fact, the PLUS program, which includes similar loans to graduate students, is the most profitable of the 120 or so federal lending programs. That sounds like a good thing, until you remember the government’s profit comes from its own citizens, often citizens of modest means.

Student loans enhance accessibility, but at what cost?

… PLUS loans have also become a key revenue source for many schools, particularly historically black colleges and for-profits that tend to serve lower-income families.

But that just illustrates the increasingly tortured economic paradoxes at the heart of modern higher education, where schools have no incentive to provide affordable prices as long as they can count on federal dollars for making education affordable. Ultimately, Parent PLUS sluices more cash into the college-industrial complex, helping educators jack up their tuitions while pressuring parents to make up the difference with debt, while doing nothing to ensure they’re getting a real return on their investment. It enhances accessibility, but not really affordability, simply giving parents a way to punt the skyrocketing costs into the future.

Underwriting standards are lax, and the government lends money to “people with no clue if they can pay it back”.

Many critics argue that Parent PLUS should be abolished, and that the government should expand Pell grants and raise caps on student loans instead. But even those who want to continue the program — including Rodriguez in the White House and Republican staffers on Capitol Hill — seem to agree there are relatively obvious ways to strengthen it. The most evident would be real underwriting standards to evaluate the ability to pay of potential borrowers. Another would be strict loan caps. Or a combination of those reforms could link the creditworthiness of borrowers to the size of the loans they’re eligible to receive, the kind of calculation real banks make. Even Draeger, who represents aid administrators at 3,000 colleges and universities, said the system needs structural changes to protect vulnerable families.

A parent’s comment in a CollegeConfidential thread illustrates part of the problem.

My main concern with the Parent Plus loan is the lack of consumer disclosures regarding future pymts and the cost of credit – there are none. I borrowed $24,000 this week – it took about 5 minutes – with no evaluation of my qualification to repay – and no disclosure to me of what my future pymts will be. I can see very easily how someone could get in over their head.

The major challenge to reforming the Parent PLUS program is its “immense profitability”.

… These days, the government borrows money at almost no cost, so lending at 7 percent plus fees can add up: Parent PLUS could reduce the deficit by $3 billion this year. That means any effort to scale it back and restrict it to creditworthy borrowers would cost the government a lot of money….

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May 13, 2014

New report on Parent PLUS loans.

by Grace

The American Enterprise Institute has produced a report on Parent PLUS loans.

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.

Related:  Parent PLUS loans are similar to no-doc mortgage loans (Cost of College)

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Awilda Rodriguez, “Access to what and for whom? A closer look at federal Parent PLUS loans”, American Enterprise Institute, May 01, 2014.

December 11, 2013

How will parents ever be able pay off their kids’ student loans?

by Grace

A recent college graduate is concerned about his parents’ ability to pay off his student loan.

NEW YORK—Recent Wesleyan University graduate Zach Wallace confided to reporters Thursday that he has no clue how his parents are supposed to earn enough money to settle his $40,000 in student loan debt. “My God, they’ll be lucky if they’re able to pay this off while they’re still in their 70s,” said the 23-year-old film studies major and unpaid intern, noting the minimum monthly payments his father and mother will need to make just to keep their heads above water. “The student loan system takes advantage of a lot of parents who simply don’t realize what they’re getting into. Then four years later it’s like, ‘Welcome to the real world, Mom and Dad!’”…

Wallace worries that his parents will be forced to claim bankruptcy by the time he has completed his Ph.D.

* * *

You probably guessed it already, but this news story is from the Onion.  Like most humor, there is an element of truth in it.

Student loan debt amassed by parents is growing faster than loans taken out by the student.

Parents’ loan debt has more than doubled over the last decade — exceeding $100 billion dollars or 10 percent of all outstanding student loan debt, according to the independent research firm FinAid.org.

“Parents of every income level are increasingly borrowing for their children’s college education. It doesn’t matter whether the parents are low income, middle income or upper income. There’s been dramatic growth in the percentages of parents who’ve been borrowing,” says FinAid.org founder and publisher Mark Kantrowitz.

Many parents who co-signed loans or borrowed money on their own for their children’s education now face the loss of their retirement nest eggs, homes and other assets….

Parents have an average of about $34,000 in student loans and that figure rises to $50,000, including interest, over a standard 10-year loan repayment period.

Parent PLUS spending has shot up over the last decade.

20130525.COCParentPlusGrowth2

Aging Americans 60 and older owe about $36 billion in student loans.

Some of these older Americans are still grappling with their first wave of student loans, while others took on new debt when they returned to school later in life in hopes of becoming more competitive in the labor force. Many have co-signed for loans with their children or grandchildren to help them afford ballooning tuition.

Not so funny after all.

Related:  Qualifying for a parent Direct PLUS loan (Cost of College)

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