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.
Proponents of the Parent PLUS program assert that many students would not be able to gain access to a postsecondary education without the assistance of these loans. One report advocating for greater access to the program notes that “PLUS Loans have become especially important for low-income parents at [Historically Black Colleges and Universities] as other forms of credit have been squeezed off the market.” For some, access to college and access to Parent PLUS loans are synonymous. The U.S. Department of Education’s (ED) Acting Under Secretary Jamienne Studley characterizes ED’s precarious stewardship of Parent PLUS as providing “access to higher education, while also acknowledging [ED’s] legal obligation and duty to determine borrower eligibility.”
These tensions have never been more evident than when ED tightened the underwriting criteria for Parent PLUS in 2011. 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.
Researchers, institutions, and advocacy groups have all weighed in. However, much of the debate around Parent PLUS has taken place in the absence of empirical data about the program. Simply put, Parent PLUS has been grossly understudied as a financial aid tool, in large part because data are lacking on the characteristics of PLUS borrowers and the schools they attend. Critical questions remain: what exactly are students gaining access to with these loans? Where is this loan money going? Which families are taking out Parent PLUS loans? Combining several existing federal datasets, this report seeks to fill in some of these information gaps and advance our understanding of the Parent PLUS Loan program.
This report is divided into two sections. First, I examine the types of colleges that benefit from Parent PLUS loans, both in terms of overall volume and their relative reliance on the program as a source of revenue. In the second section, I consider the types of families who are borrowing. I then close with a discussion of the policy implications of these findings.