This blog post is the third part in a series that takes a look at recent changes to the credit criteria for Parent PLUS loans and the subsequent effect on colleges and universities. You can find the introductory post here and the second post here.
For nearly a year the Department of Education has been under a firestorm of criticism from the Historically Black College and University (HBCU) community and its advocates over changes to the PLUS loan program that they say reduced revenue and enrollment at these institutions.1 According to an article yesterday in the Chronicle of Higher Education, the Education Department finally relented and made further accommodations to help more applicants get approved, while promising to rethink the criteria as part of a rulemaking session next spring. But did loosening criteria really solve a national policy problem? Or was it a set of changes to benefit a small subset of institutions, the result of which will mean greater amounts of worse debt for families?
The Department’s changes were outlined in a letter to Rep. Marcia Fudge (D-Ohio), the Chair of the Congressional Black Caucus. In it Education Secretary Arne Duncan wrote that, the Department would more than double the size of debt it considers to be “de minimis,” allowing rejected borrowers with larger debts of any type to be approved through an appeals process. "We believe this may help families who have relatively small adverse credit events that negatively impact their credit histories, such as unpaid medical debt, parking tickets, or cell phone bills of greater than 90 days duration,” the letter says.
This is a huge victory for many HBCUs and for-profits, which rely heavily on PLUS loans because they charge relatively high prices, enroll large numbers of low- and moderate-income students, and lack the resources to give out much institutional aid. The losers in this battle are the low- and moderate-income families who will be allowed to borrow up to the cost of attendance of a school, with no regard to whether they have any hope of paying it back. And remember, parent PLUS loans are not eligible for any of the income-based payment plans or forgiveness options nor are they dischargeable in bankruptcy. This means a family making $30,000 a year could borrow more than their salary to send their child to school.
Here are four reasons why it’s a big mistake for the Department to weaken the adverse credit standards for the Parent PLUS loan:
- This “patch” fixed a problem that appears to not have existed. According to Secretary Duncan’s letter, 95 percent of students whose parents were initially denied a PLUS loan to enroll in an HBCU ended up still attending an institution of higher education. Many did so with the assistance of the additional $4,000-$5,000 in unsubsidized Stafford loans that students whose parents are denied a PLUS loan are able to borrow. For students this fall, that additional Stafford debt will carry an interest rate that is 2.55 percentage points lower than what their parents would have paid on a PLUS loan. Losing 5 percent of applicants is not good, but it is far different from the sky is falling outcry.
- This “fix” screams institutional capture. The Department’s letter provides a possible suggestion as to why it made the change even though this doesn’t appear to be a national problem. It notes that within the 95 percent of students whose parents were denied and still enrolled, 19 percent went somewhere besides the initial HBCU. From a national picture, the story is no different—only 5 percent of students never enrolled. But from the narrow institutional perspective, one-quarter disappeared. The change thus feels less like solving a national problem but rather addressing the concerns of a small subset of institutions.
But is that even the responsibility of the Department of Education? Its job is to oversee the broader national interest in education and to help more individuals earn postsecondary credentials. That’s exactly why they made changes to the adverse credit standards for the Parent PLUS loan—the only proxy the Department has to ensure they aren’t saddling parents with debt they won’t be able to pay back. This move makes it seem like the Department is ignoring the broader national interest over the interest of a handful of politically powerful institutions. And what about those students who chose to go elsewhere? Wouldn’t it be worth knowing whether they are actually taking on less debt now?
- Changes to “de mimimus” credit will allow parents to borrow even though they have financial risk factors. Although we do not know what the “de minimus” amount is, the letter is not clear whether it applies only to collections or charge off or whether all debts will get this tolerance. In the latter case, a parent who is 90 days late with a large credit card charge could borrow nearly unlimited amounts under the PLUS program, even though they’re struggling with debts that never would have been approved prior to the change.
- We should be concerned about people not paying their cell phone bills. In the letter to Rep. Fudge, Secretary Duncan alluded to the fact that the Education Department wants to help families obtain loans who have small adverse credit events related to things like medical debts or cell phone bills. It’s unclear if this means special treatment for these debts or they will just be covered under the larger de minimis amount, but these types of debt are not equivalent. Unpaid medical debt is a sensible thing to consider, since we don’t want to penalize families who have suffered a sudden financial hardship due to a medical emergency out of their control. But unpaid parking tickets and cellphone bills are arguably not in the same realm of sudden, medical debt and speak to someone who is struggling to pay their regular bills.
It is clear that HBCUs and for-profits have gained inroads in ensuring the Education Department reverts back to the old credit standards for Parent PLUS loans during negotiated rulemaking this spring. Part of the problem is that the Department only has proxy measures to gauge a family’s financial health. So all they can do to ensure families aren’t taking on too much debt is to patch the credit check.
Enough with proxy measures. Instead of small tweaks to a backward-looking credit check, the parent PLUS loan application process should include a forward-looking “Ability to Pay” measure. Adding “Ability to Pay” to the credit check would help protect parents from over-borrowing at whatever cost to send their child to school by looking at parents’ indebtedness (with or without PLUS loans) relative to their earnings. In designing this metric, the Education Department could include exemptions for families who have suffered a sudden and catastrophic financial hardship, such as a medical emergency, that may have affected a parent’s debt to income ratio.
Fortunately, there will be an opportunity to take a reasoned approach to PLUS criteria at the negotiated rulemaking session that is likely to take place next spring. As that process goes on, the Department must not bend to the will of politically strong institutions and go back to where we started. Instead it should make real changes that are transparent and capture the exact financial health of families so that we make sure the very students we are looking to give access to, don’t impoverish their parents just to do so.
Stay tuned to Higher Ed Watch for the continuing coverage of the Parent PLUS loan crisis.
1In order to receive a Parent PLUS loan, applicants cannot have been through certain significant financial conditions in the past five years, such as bankruptcy, foreclosure, or a tax lien. Nor can they have any debts that are more than 90 days past due. In the fall of 2011, the Department began counting accounts whose current status was in collections or charged off as evidence of a debt more than 90 days late and thus grounds for an application being denied. This resulted in a substantial uptick in the number of denied loans, typically at high-cost low-resource institutions like HBCUs and some for-profit colleges. Read more here.