Analysis of federal parent PLUS loans

An analysis of federal parent PLUS loans

The Parent Trap

New America | Education Policy Program

January 2014

The Parent Trap

Parent PLUS Loans and Intergenerational Borrowing

Rachel Fishman

1

Overview
I

n fall 2011, the U.S. Department
of Education quietly tightened
the credit check criteria for Parent
PLUS loans, a federal program that
provides loans to parents to send
their children to college above
and beyond the federal loans
available to students.1
As a result, many families and higher education
institutions were shocked to find that parents
approved for the loan one year were suddenly
denied the next. Students in the middle of their
academic careers found themselves scrambling
to cover a much larger portion of their bill
upfront. Incoming freshmen who had already
paid their deposits were faced with a larger
amount due than initially anticipated. Some
institutions, such as historically black colleges
and universities (HBCUs), witnessed declines
in enrollment and a loss of revenue, forcing
delayed physical plant maintenance, furloughs,
and layoffs.2

About the Author
Rachel Fishman is a policy analyst with New America’s Education
Policy Program. She can be reached at fishmanr@newamerica.org.
About New America
New America is a nonprofit, nonpartisan public policy institute that
invests in new thinkers and new ideas to address the next generation of challenges facing the United States.

© 2013 New America
This report carries a Creative Commons license, which permits
non-commercial re-use of New America content when proper
attribution is provided. This means you are free to copy, display
and distribute New America’s work, or include our content in
derivative works, under the following conditions:
Attribution. You must clearly attribute the work to New America,
and provide a link back to www.newamerica.org.
Noncommercial. You may not use this work for commercial purposes without explicit prior permission from New America.
Share Alike. If you alter, transform, or build upon this work, you
may distribute the resulting work only under a license identical to
this one.
For the full legal code of this Creative Commons license, please
visit www.creativecommons.org. If you have any questions about
citing or re-using New America content, please contact us.

Since then, leaders of HBCUs have publicly
demanded that the Department reverse the
eligibility changes. “The drastic decision to
change the credit regulations controlling the
Parent PLUS loans without effective evaluation of its impact nationally and specifically
on HBCUs and without prior communication
and input, has resulted in a tornadic effect,”
remarked Carlton Brown, the president of Clark
Atlanta University, “…A one year drop in over
50 percent of approved Parent PLUS applications, [and] more than $50 million in revenue
losses.”3 The controversy over the changes
even reached the front page of The Washington Post’s Sunday edition.4
It is true that the Department’s execution of
the change was poor. It should never have left
students on track to graduate suddenly scrambling to find the funds to remain in school. But
the Department’s underlying motivation was
sound. The federal government has made it
much too easy for lower- and middle-income
families—not just students—to get buried in
debt, putting their financial wellbeing at risk.5
The Department was right in trying to prevent
parents from borrowing loans they might not
be able to afford. The size of a PLUS loan is
only capped by a college’s full “Cost of Attendance” (COA), not just tuition and fees, but

the total budget that a student may receive
as determined by the institution. Since PLUS
loans don’t build a parent’s human capital, they
aren’t eligible for flexible repayment through
Income-Based Repayment (IBR), a repayment
plan that allows the borrower to repay the
loan based on his or her income. They are also
seldom dischargeable in bankruptcy.
If anything, the Department’s changes were
too modest. More far-reaching reforms are
needed to ensure that the Parent PLUS Loan
program is correctly targeted to families who
can afford to pay the debt back. Policymakers
should consider one of the following three
options:
• Add an “Ability to Pay” metric to the Parent
PLUS credit check. In addition to a backward-looking credit check, adding an “Ability
to Pay” metric would be able to better capture
whether parents have the resources to pay
back the loan. This would help ensure parents
aren’t over-borrowing to send their children to
college.
• Cap Parent PLUS loans. Instead of allowing
parents to borrow up to the full COA, the loans
should be capped to prevent over-borrowing
and to remove the incentive for institutions
to increase revenue by raising their COA and
funding the increase through Parent PLUS.
• End the Parent PLUS loan program and
increase dependent student loan limits. Many
parents who take out federal PLUS loans would
not be able to secure a loan in the private
market. The government should not be in
the business of lending loans to low-income
parents as a de facto extension of the student
loan program. To compensate for the loss of
the program, policymakers should increase
dependent student loan limits.
This policy brief explains what Parent PLUS
loans are and how they became part of the
federal financial aid landscape. It details the
recent changes that the Department made
and explores loan volume data to assess which
sectors and institutions have been hit hardest
by the changes. It then describes the problematic nature of PLUS loans for low-income
families, and how institutions can use them
to game accountability measures and make
their prices more opaque to consumers. To
conclude, the paper expands on the recommendations offered above and further explains
how Parent PLUS loans should be reformed.

2

The Parent Trap

The Parent Trap

Parent PLUS Loans: A Primer
C
ongress created the Parent
PLUS Loan program in 1980,
primarily to help middle- and
upper-middle- income families
access funds to send their children
to expensive private colleges.6
Initially, the loan was capped at
$3,000 per academic year (about
$8,500 in today’s dollars) with an
aggregate limit of $15,000 (about
$42,500 in today’s dollars).7 In
1992, lawmakers removed PLUS
loan limits, allowing parents
to borrow up to the full COA of
colleges. At the same time, in
order to protect parents, they
restricted eligibility to parents
without an adverse credit history.8
Today, Parent PLUS loans are more like private
loans than federal student loans. PLUS loans
have a relatively high interest rate—a fixed rate
of 7.9 percent for the 2012-13 academic year.9
And because of its relatively high origination
fee of 4.2 percent, the loan’s annual percentage rate (APR) is over 9 percent. Interest
starts accruing once the loan is disbursed, and
parents can either start making payments right
away or defer them until the student drops
below half-time status.
Students don’t have to undergo a credit check
to access federal student loans because loans
made to students are a direct investment in
building their human capital. Presumably, once
the student graduates, he will be able to obtain
a job and have the resources to pay back the
investment the federal government made.
Since loans to parents do not assume increased
wages, they have to meet a minimum credit
standard to qualify. The credit check for a PLUS
loan is more lenient than the one that a private
lender would conduct. Instead of considering a parent’s income or ability to repay the
loan, it looks only at a parent’s adverse credit
history. And the absence of any credit history
is not considered a sign of an adverse credit
history. In fact, up until 2011-12 it was easier
for parents to apply for a loan than it was for

a student, as parents did not have to fill out
the Free Application for Federal Student Aid
(FAFSA) to obtain a PLUS loan.10

Additionally, PLUS loans have no cap—parents
can borrow up to the full COA for an institution. This is a stark contrast with federal
Stafford loans, which are capped at between
$5,500 and $7,500 a year for dependent
students. COA can include many factors, but
usually consists of: tuition and fees; room and
board; books and supplies; transportation; and
loan fees. The average COA per year at a public
four-year school in 2011-12 was $23,200,
compared with $43,500 at private, nonprofit
institutions, and $29,000 at for-profit institutions.11
Like other student loans, Parent PLUS loans are
seldom dischargeable in bankruptcy. But even
more dangerous for borrowers, they also don’t
normally qualify for some of the most flexible
repayment options designed to help struggling borrowers, like IBR.12 As a result, parents
who find themselves in over their heads on
PLUS loan debt can be forced to make difficult
decisions like delaying retirement or may even
face Social Security garnishment.
Even though the PLUS loan program was
established to help middle- and upper-middle
income families, the program has expanded
substantially over time to provide access
to credit for lower and moderate-income
parents to send their children to expensive
colleges. The enormous growth of the
program happened after the peak of the Great
Recession in 2009, at a time when family net
worth diminished while college prices soared.
According to The Chronicle of Higher
Education, the government issued $10.6 billion
of Parent PLUS loans in 2011, $6.3 billion more
in inflation-adjusted dollars than it did in 2000.
During that time, the number of families served
almost doubled to approximately one million
in 2011.13 (Charts 1 and 2 show the recipients
and disbursements from pre-recession 2006
to 2013.) And since many colleges use Parent
PLUS loans to fill the gap between what they
charge and the federal, state, and institutional aid their students receive, parents turned
toward these easily available loans to ensure
their children could attend the college of their
dreams.

Chart 1: Recipients of Parent PLUS Loans from Q3 2006 to 2013.

929,302

904,369

79+75+70+69+80+93+90+72

785,443

2006

745,126

695,451

2007

2008

798,915

721,752

685,308

2009

2010

2011

2012

2013

Source: New America Foundation analysis of Federal Student Aid data.

Chart 2: Disbursements of Parent PLUS Loans from Q3 2006 to 2013.

$11bn

$11bn

$9.9bn

2011

2012

2013

65+64+60+60+73+90+91+89
$9.3bn

$8.5bn

$8.4bn

$8bn

2006

2007

2008

$8bn

2009

2010

Source: New America Foundation analysis of Federal Student Aid data.

3

4

The Parent Trap

The Parent Trap

Reforming the
PLUS Credit Check
Before October 2011, prospective
parent borrowers couldn’t have
any current accounts more than
90 days delinquent, or any foreclosures, bankruptcies, tax liens,
wage garnishments or defaults
in the past five years to pass the
PLUS loan credit check.
Starting in October 2011, the Department
expanded its definition of what was considered a 90-day delinquency to include accounts
whose most recent status was “in collections”
or “charged off” in the last five years.14 This

means that if a parent had debt that her lender
put into collections in the past five years and
she later restored her credit to good standing,
she would be approved. But if a parent’s debt
went delinquent for so many months that it
then went into collections within the past
five years and she never managed to restore
her credit to good standing—indicative of
continued financial strain—she would be ineligible for a Parent PLUS loan. The Department
of Education allows the children of parents
who were rejected for PLUS loans to borrow
at the “Independent” student loan limit.15 This
results in the ability to borrow an additional
$4,000 to $5,000 annually (or $9,500 to $12,500
total) in federal Stafford loans depending on
the student’s year in school on top of what the
student has already been allowed to borrow.16

Sectors with the Largest
Declines in Recipients and
Disbursements
From October 2011 to October
2012—before and after the
new policy was implemented—
rejection rates for PLUS loans
increased from 28 percent to
38 percent.17 Some sectors, like
for-profits and HBCUs, were
harder hit than others. Morehouse
University, for example, was
suddenly thrown into a financial
crisis in 2012 after the PLUS credit
changes. Many freshmen who had
paid their deposits suddenly could
not afford Morehouse. This
enrollment decline forced a
faculty and staff furlough.

for-profit sector was hit even harder.18 Since
the policy change was implemented, for-profits have lost approximately $790 million more
than HBCUs in PLUS loan disbursements. In
part, this could be due to the decrease in enrollment that has occurred over the past two
years at for-profits.19 But it still remains that the
for-profit sector has a much higher percentage
of Parent PLUS loan borrowers than HBCUs.20
Parent PLUS borrowers are overrepresented at
for-profit institutions compared to their share of
enrollment.

Even though HBCUs and their advocates
have been the most vocal about the impact
of the policy change, new data show that the

Since the change to the credit check, however,
both sectors saw huge declines in recipients
and disbursements of Parent PLUS loans (Tables

An analysis of recently released data from
the Education Department’s Office of Federal
Student Aid, shows that from 2009 to 2011
both for-profits and HBCUs saw substantial
increases in recipients (approximately 50,000
and 15,000 more respectively) and disbursements (approximately $450 million and $156
million respectively). This was the peak of
unemployment, at a time when family net worth
diminished, and college prices rose sharply.

1 and 2). From 2011 to 2013 after the changes
to the credit check were put in place, HBCUs
experienced a 45 percent drop in Parent PLUS
loan recipients, and a 27 percent reduction
in PLUS loan disbursements. At for-profits,
both PLUS loan borrowers and disbursements
declined 54 percent.

at for-profits overall and compared with
HBCUs (see Chart 3 and Table 3). HBCUs
only make up a small share of volume in the
program. Approximately 2 percent of all undergraduates are in HBCUs and these institutions
represent between 3 and 4 percent of PLUS
borrowers. From 2006 to 2011, the share of
for-profit undergraduate enrollments fluctuated from 5 to 7 percent, but accounted for 16
to 18 percent of total Parent PLUS loan recipients. In other words, Parent PLUS borrowers
at for-profit colleges were almost three times
overrepresented compared to their share of
enrollment. That’s noteworthy considering
that for-profit institutions have been seen as
catering to the needs of adult students who
don’t qualify for Parent PLUS loans. The data
show there are quite a few traditionally-aged,
dependent students attending for-profit
institutions, and the schools are costing their
families a lot of borrowed money.

While HBCUs have been vocal about the
decline in PLUS loan disbursements since the
credit change, over the past five years their
disbursements actually increased 14 percent.
Meanwhile, the for-profit sector experienced
a 30 percent decline in recipients and a 33
percent decline in disbursements over that
time period. In sum, the for-profit sector has
seen the biggest loss overall of PLUS loan recipients and disbursements.
But what’s most startling is the substantial
overrepresentation of Parent PLUS borrowers

Table 1: Percent Change in Parent PLUS Recipients by Sector, 2006-2013
2006- 2007- 200807
08
09

2 Year
5 Year
2009- 2010- 2011- 2012Change Change
10
11
12
13
2011-13 2008-13

Change
Since
2006

For-Profit

-7%

-5%

7%

25%

16%

-26%

-38%

-54%

-30%

-39%

HBCU

-9%

-1%

-6%

21%

43%

3%

-46%

-45%

-10%

-19%

Nonprofit

-6%

-8%

-3%

13%

15%

1%

-15%

-14%

9%

-6%

Public

-3%

-7%

-4%

15%

14%

4%

-16%

-12%

12%

1%

Table 2: Percent Change in Parent PLUS Disbursements by Sector, 2006-2013
2006- 2007- 200807
08
09

2 Year
5 Year
2009- 2010- 2011- 2012Change Change
10
11
12
13
2011-13 2008-13

Change
Since
2006

For-Profit

-4%

-7%

5%

16%

19%

-20%

-42%

-54%

-33%

-41%

HBCU

-5%

2%

-7%

18%

42%

13%

-36%

-27%

14%

10%

Nonprofit

-1%

-5%

-2%

14%

16%

8%

-8%

-1%

28%

20%

Public

1%

-4%

-1%

19%

19%

10%

-9%

0%

40%

35%

5

6

The Parent Trap

The Parent Trap

Chart 3: Share of Parent PLUS Loan Recipients Compared to Enrollment

2+ 2+ 2+
3+5+20R 16+34T3+6+20R 16+33T3+6+20R 16+33T
2+ 17+32T 2+ 2+
3+7+19R 4+6+19R 18+31T4+6+19R 18+31T
Recipients

HBCUs

Recipients

Recipients

Enrollments

Enrollments

Enrollments

2006

ForProfits

Non
Profits

2007

Recipients

Recipients

Recipients

Enrollments

Enrollments

Enrollments

2009

Public
(Not shown)

2008

2010

2011

Table 3: Average Representation of Parent PLUS Borrowers by Sector, 2006-2013
Average Share of
Enrollment

Average Share of
PLUS Borrowers

Overrepresentation or
Underrepresentation

HBCU

2%

3%

1.5x overrepresented

For-Profit

6%

17%

2.8x overrepresented

Nonprofit

20%

32%

1.6x overrepresented

Public

73%

47%

0.6x underrepresented

Institutions with the
Largest Declines in
Recipients and
Enrollments
For-profits experienced the
largest declines in PLUS loan
recipients and disbursements
since the credit change was implemented, but which individual
institutions suffered the sharpest
declines? Tables 4 and 5 show the
colleges and universities with the
largest reductions in recipients
and disbursements from pre-recession 2006 to 2013. Over 72
percent of the institutions that
lost the largest number of recipients and 87 percent that lost the
largest amount of disbursements
are from the for-profit sector.
The remainder are high-priced
nonprofit colleges and public universities.
One of the hardest hit institutions was ITT
Technology Institute-Indianapolis, which
experienced a reduction of more than 5,000
Parent PLUS loan recipients and a loss of
over $39 million in disbursements since the
change to the credit check. Leading up to the
credit change, ITT-Indianapolis had a net price
for low-income students of approximately $22,000.21 Nearly 81 percent of full-time,
first-time students enrolled at the school
received Pell Grants.22 Since first year undergraduate federal Stafford loans are capped at
$5,500, it seems likely that the families of many
students—including low-income, Pell-eligible
students—had to borrow through the Parent
PLUS loan program to cover the high net price.

What’s particularly concerning, however, is
ITT-Indianapolis’ high Cohort Default Rate
(CDR) of 34 percent. This means that three
years after leaving ITT, approximately 34
percent of students default on their federal
loans. Since this level of default may be an
indication that students are not receiving the
support and education they need, ITT is at the
risk of facing sanctions from the Education Department. And since Parent PLUS loans are not
included in CDR calculations, the default rate
for parents could be similar, lower, or higher,
but there is no way of knowing. (For more on
CDR and PLUS loans see page 10.)
The story of ITT-Indianapolis is repeated at
other institutions that have seen large declines
in PLUS loan recipients and disbursements. At
many tuition-dependent colleges where there
were high percentages of Pell Grant recipients and high net prices, significant declines
in disbursements and recipients followed the
tightening of PLUS credit standards. Take the
University of Phoenix-Phoenix campus, where
83 percent of incoming full-time students in
2011-12 were Pell Grant recipients. By 2013,
the school had lost over 2,500 PLUS loan
recipients and $22 million in disbursements.23
Or take the Art Institute of Atlanta where 79
percent of incoming students received Pell
Grants and faced a net-price of over $25,000.
The school experienced a decline of 1,602
PLUS recipients and a loss of over $35 million
in disbursements from 2011 to 2013.24

7

8

The Parent Trap

The Parent Trap

Table 4. Colleges and Universities with the Largest Declines in Recipients
ForProfits

Non
Profits

Table 5. The Colleges and Universities with the Largest Decline in Disbursements
ForProfits

Public
(Not shaded)

Table 4(a). Two Year Change (2011-13)
Institution

Non
Profits

Public
(Not shaded)

Table 5(a). Two Year Change (2011-13)

Recipients Decline

Change

Dollar Decline

Change

ITT Technical Institute-Indianapolis

-5187

-65%

Institution
Full Sail University

-$48 987 285

-51%

DeVry University-Illinois

-2593

-60%

ITT-Indianapolis

-$39 154 382

-63%

University of Phoenix-Phoenix

-2530

-66%

The Art Institute of Atlanta

-$35 841 313

-67%

Pennsylvania State University

-2469

-22%

University of Phoenix-Phoenix

-$22 816 574

-70%

The Art Institute of Atlanta

-1602

-57%

DeVry University-Illinois

-$21 010 854

-57%

Universal Technical Institute of Arizona Inc

-1468

-42%

The Illinois Institute of Art-Chicago

-$20 982 331

-56%

United Education Institute-Huntington Park

-1307

-87%

Ohio State University

-$16 288 508

-26%

Southern Illinois University Carbondale

-1256

-54%

Universal Technical Institute of Arizona Inc

-$16 126 181

-46%

Wyotech-Laramie

-1213

-66%

Pennsylvania State University

-$16 000 000

-10%

The Art Institute of Phoenix

-1186

-49%

The Art Institute of Charlotte

-$15 093 572

-92%

Table 4(b). Five Year Change (2008-13)
Institution

Table 5(b). Five Year Change (2008-13)

Recipients Decline

Change

Institution

Dollar Decline

Change

DeVry University-Illinois

-1644

-49%

Wyotech-Laramie

-$23 714 389

-71%

Universal Technical Institute of Arizona Inc

-1637

-45%

Universal Technical Institute of Arizona Inc

-$22 252 659

-54%

Universal Technical Institute-Motorcycle Mechanics

-1356

-53%

Universal Technical Institute-Motorcycle Mechanics

-$16 187 787

-61%

Wyotech-Laramie

-1134

-65%

DeVry University-Illinois

-$16 077 926

-50%

University of Phoenix-Phoenix Campus

-1030

-44%

International Academy of Design & Technology Online

-$14 404 198

-81%

Westwood College-Denver North

-853

-73%

Westwood College - Denver North

-$9 813 090

-74%

University of North Carolina Wilmington

-826

-46%

Saint Olaf College

-$9 081 519

-74%

St. Olaf College

-814

-79%

Brooks Institute

-$8 787 306

-71%

University of California-Riverside

-771

-40%

American Intercontinental University

-$7 692 233

-80%

International Academy of Design & Technology Online

-714

-66%

George Washington University

-$7 436 709

-32%

Table 4(c). Change since 2006
Institution

Table 5(c). Change since 2006

Recipients Decline

Change

Dollar Decline

Change

Universal Technical Institute of Arizona

-3232

-62%

Institution
Universal Technical Institute of Arizona Inc

-$41 656 850

-69%

Wyotech-Laramie

-2289

-79%

Wyotech-Laramie

-$35 084 590

-78%

DeVry University-Illinois

-2092

-55%

DeVry University-Illinois

-$24 658 741

-61%

Universal Technical Institute of Texas Inc

-1265

-55%

American Intercontinental University-Online

-$17 140 578

-90%

American Intercontinental University-Online

-1262

-85%

Brooks Institute

-$17 061 661

-82%

Ohio State University

-1195

-25%

International Academy of Design and Technology

-$16 806 544

-83%

Westwood College-Denver North

-1169

-79%

Universal Technical Institute of Texas Inc

-$16 368 415

-63%

Universal Technical Institute-Motorcycle Mechanics

-1105

-48%

California Culinary Academy

-$14 766 620

-98%

Purdue University

-1017

-24%

Westwood College-Denver North

-$13 398 575

-80%

University of California-Riverside

-999

-46%

Universal Technical Institute-Motorcycle Mechanics

-$11 847 828

-53%

9

10

The Parent Trap

The Parent Trap

Low-Income Families and
PLUS Loans
According to recent data from
the Department of Education,
approximately 8 percent of
Pell Grant recipients’ parents
borrowed PLUS loans in 2012,
with a median cumulative PLUS
debt of $9,500.25 While for-profits
may have experienced the largest
total dollar and recipient decline,
their low-income families did not
borrow as much in PLUS. About 8
percent of Pell parents at for-profits borrowed PLUS loans, with a
median cumulative debt of $7,883.

The story at HBCUs, however, is much bleaker
for low-income students. There, 20 percent
of Pell recipients borrowed PLUS loans, with a
cumulative loan debt of $13,900. When drilling
down further, at private, nonprofit HBCUs
nearly 37 percent of low-income parents
borrowed, with a median cumulative PLUS
debt of $19,733.
Since over 75 percent of dependent Pell Grant
recipients come from families making less than
$40,000, this means some low-income parents
borrow PLUS loans that eat up a significant
portion of their incomes.26 In some cases, PLUS
debt may equal more than a parent’s income.
This does not even take into account the fact
that this borrowed amount is in excess of what
the student has already borrowed through
the federal government to fund his or her
education.

Disturbing PLUS Loan
Practices
The intense surge and decline of
Parent PLUS loans may be indicative of institutions’ overreliance
on PLUS loan debt to hide their
prices from students and skirt accountability measures.

Including PLUS Loans in Financial
Aid Award Letters
Current financial aid award letters make it
difficult for all but the savviest of students to
figure out their financial aid. These financial aid
award letters are provided to students to help
understand how much they will pay for their
education. Many schools package scholarships, grants, work-study, and loans together
yielding one seemingly gigantic “award,” even
though students will have to pay the loans
back. Some letters are riddled with jargon and
acronyms, making it almost impossible for
students to understand whether the aid is a
loan or a grant. When a college packages PLUS
loans in financial aid award letters, it makes
the college seem more affordable than it really
is. Many families believe they have no other
choice to fill the gap than take out a PLUS loan.

Morehouse is one among many institutions
that package PLUS loans within their financial
aid award letters, making it seem like this
money is easily available. For example, a copy
of a financial aid award package obtained by
New America shows that Morehouse College
included over $30,000 in PLUS loans for one
student for one academic year (see Figure 1). At
that rate, in four years the student’s parents will
be on the hook for more than $120,000 after
the student borrowed approximately $27,000
in Federal Stafford Loans for his education. This
overreliance on PLUS loans put Morehouse’s
budget on shaky grounds—once the credit
check changes went into place, enrollments
declined causing the university to furlough
faculty and staff.27

Cohort Default Rate Manipulation
At a public hearing the Education Department
recently held in Atlanta, evidence emerged
that some colleges might be steering students
away from lower-cost federal student loans and
toward Parent PLUS loans to avoid penalties
associated with high student loan defaults.
Testifying at the hearing, Everette Freeman, the
president of the HBCU Albany State University,
stated, “Our institutions as a group have been

trying to move away from Stafford loans, to the
degree that we have been able to.” The schools
have been doing this, he said, because, “the
federal Stafford loan program, if it is not repaid,
has a direct and negative impact on the institution’s ability to draw down federal funding.”
Freeman complained that the Department’s
decision to tighten the PLUS loan eligibility
requirements were driving students back to the
Stafford loan program, which could be detrimental for his institution:
We know that the federal government
monitors our default rate. We certainly
monitor our default rate, and this is one
of those canaries in the mines, that if we
do not return to provisions that allow for
a credit formula that makes sense, we will,
indeed, find an increase in the Stafford
loan and the corresponding negative
impacts that defaults will create.
These statements suggest that institutions can
skirt accountability meant to protect students,
families, and taxpayers by steering parents

toward PLUS loans, which are not included in
an institution’s Cohort Default Rate.
What Freeman neglects to mention, however,
is that while shifting the debt burden onto
parents through PLUS loans is easy for the
institution, it may not be easy for struggling
parents. For one thing, shifting debt from
Stafford to Parent PLUS loans is costly for
families. If a student borrowed the full amount
of Unsubsidized Stafford loans available to
him over four years for a bachelor’s degree,
he would borrow $27,000. Under the standard
10-year repayment plan, that equates to
approximately $323 per month, or $38,725
total. But under PLUS loans, that same debt
would cost approximately $387 per month, or
$46,468 total. So parents would have to pay
nearly 20 percent more for the same debt—an
extra $64 more per month and more than
$8,000 more over the lifetime of the loan. Not
only that, but struggling parents would not be
able to take advantage of the Income-Based
Repayment plans that students are eligible for
under the Stafford loan program.

Figure 1. Inclusion of PLUS Loans in Financial Aid Award Letter from Morehouse College

11

12

The Parent Trap

The Parent Trap

Recommendations
During a recent Education Department hearing, Catherine Hurd of
Johnson C. Smith University, an
HBCU in North Carolina, publicly
criticized the Department’s
changes to the PLUS loan credit
criteria.
She witnessed many students who could no
longer enroll in the university without the PLUS
loan because they didn’t have enough money
upfront to cover their costs. One story she
shared was about a homeless parent borrower
who was denied a PLUS loan. “She agreed
to send her weekly paycheck to Johnson C.
Smith until the balance was paid, and that she
would continue to remain homeless until she
could get her feet back on the ground,” Hurd
explained. “As a result of the changes in the
criteria for the parent PLUS loan, she had no
other alternative but to turn to these means.”28
It has been difficult for college administrators on the front lines of the PLUS loan crisis,
witnessing parents unable to borrow and
faced with whether their students will have to
leave the institution and enroll elsewhere. But
it is also harmful to give a struggling parents
access to a high-interest, inflexible loan on
behalf of their children. What are the chances
that a homeless mother will be able to repay
thousands of dollars in college debt? How will
that debt affect her ability to find a place to
live? Not giving a loan to a homeless parent
doesn’t mean her daughter can’t go to college.
She just may not be able to go to Johnson C.
Smith.
Federal student loans are a critical part of a
social equity and human capital agenda. They
exist to invest in human capital of the student
and provide access to higher education. It
also exists to solve a market problem. Without
a federal program, most students would not
have access to loans, since lenders have little
to no information about the students on which
to base the decision to lend. Typically, students
have limited credit histories and may have no
income or assets. The federal government
provides students with the capital they need to
invest in a college education that will pay both
individual and societal dividends.
Parent PLUS loans do not fall within this same
policy rationale. First and foremost, there is no
similar market problem with respect to lending

to parents that the program needs to address.
Unlike for students, lenders can judge parents’
creditworthiness in the same way they would
for any other type of loan – and a market for
unsecured consumer loans does in fact exist
and is quite robust.
Moreover, parent loans aren’t a direct investment in the student—they allow parents
whose children are already eligible for federal
student loans to borrow even more. In this
case, parents are investing in the future of
their child, not their own human capital. And
although many parents may expect their child
to pay back the loan on their behalf once he
graduates, they are the ones ultimately on the
hook for the loan.
Perhaps the most important difference is that
parent earnings—the ability to repay loans—
are unchanged by the fact that they received
a loan to finance their child’s education.
Obviously the same is not true for a loan to
the student. Since parents don’t receive direct
financial benefits from the loan in terms of
increased income, taking on Parent PLUS loans
they cannot afford saddles them with debt they
can’t pay off, that is seldom dischargeable in
bankruptcy, and doesn’t qualify for the protections and flexibility of other federal student
loans. While it makes sense for the federal government to provide students access to loans
without consideration of their ability to pay,
this should not be the case for parents. For this
reason, policymakers should consider one of
the following three options for reforming the
Parent PLUS program:
• Add an “Ability to Pay” metric to the
Parent PLUS credit check. The Education
Department’s slight—but opaque—changes
to the PLUS loan credit check have frustrated
thousands of borrowers who were approved
one semester for a PLUS loan, then denied the
next. While it’s understandable that the Department wants to prevent lending to families
for whom repayment will be a struggle, it must
be more transparent when making changes to
eligibility requirements. For this reason, instead
of making small tweaks to a backward-looking credit check, policymakers should add a
forward-looking “Ability to Pay” measure to
the credit check. Adding “Ability to Pay” to the
credit check would help protect parents from
over-borrowing at whatever cost to send their
children to school.
An “Ability to Pay” metric could consist of
looking at parents’ indebtedness (with or

without PLUS loans) relative to their earnings.
Policymakers could refer to part of the
mortgage underwriting standards under the
Dodd-Frank Wall Street Reform and Consumer
Protection Act (H.R. 4173) which considers
the borrower’s credit history, current income,
expected income, current obligations, debt to
income ratio, employment status, and other
financial resources. In designing this metric,
policymakers should also consider 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-earnings ratio.
• Cap Parent PLUS loans. As colleges—especially four-year institutions—have become
more and more expensive, they are increasingly using Parent PLUS loans to cover the gap
between the maximum amount of institutional,
state, and federal aid their students receive and
the amount they charge. Depending on the
cost of an institution, this can result in parents
taking on tens of thousands of dollars of PLUS
loan debt. And since institutions largely set
their own costs by determining the budget
for a student’s official Cost of Attendance,
relatively easy access to unlimited PLUS loan
disbursements allows them to avoid maintaining or cutting their costs.
It is important to note that when the parent
of a dependent student is denied a PLUS loan,
the student is able to borrow at the higher
independent student loan limits. Parent PLUS
loans should be capped at the independent
student limit or should be capped according to
a parent’s Expected Family Contribution (EFC),
the number used to determine a student’s
eligibility for federal student aid. EFC is calculated when a family fills out the FAFSA to
apply for financial aid. So if a family fills out
the FAFSA and has an EFC of zero—indicating
that the student is truly needy and eligible for
a maximum Pell Grant—the parents would
not be able to borrow extra money. If the
federal government has determined that a
family has zero ability to pay, why would they
then give parents debt they know will be a
struggle to pay back? Capping PLUS loans not
only prevents parents from over-borrowing, it
also removes any incentive for institutions to
increase their revenue by raising their COA and
funding the increase through Parent PLUS.
• End the Parent PLUS loan program and
increase dependent student loan limits.
PLUS loans are a public policy paradox. They
are most risky for families who need them
most, and they are least risky for the families
who need them least. Those who are the
most-qualified candidates to get these loans
from a creditworthiness standpoint—parents
who have the income and resources to pay the

loans back—don’t need them other than for
short-term liquidity. Those who do not have
the resources to meet the loan obligations,
who are least qualified to receive a PLUS loan,
wouldn’t be extended a loan in the private
market in the first place. The government
should not be in the business of extending
credit to affluent parents who could be served
by the private market. Nor should they be in
the business of lending loans to low-income
parents as a de facto extension of the student
loan program. For those borrowers who are
unqualified in the private market, PLUS loans
provide a front-end benefit with unknown risk
on the back-end for borrowers.
To compensate for the loss of the Parent PLUS
loan program, Congress should increase the
dependent student loan limits. In a recent
policy paper from New America, the Education
Policy Program recommended setting one loan
limit for all undergraduate students, irrespective of their dependency status. This would
help simplify the student loan program and
set the aggregate loan limit for undergraduates at $40,000.29 That equates to an extra
$9,000 over a dependent undergraduate’s
college career. Dependent students would
receive increased access to funds that—
unlike Parent PLUS loans—would qualify for
flexible repayment terms like Income-Based
Repayment. (See box: Why the terms of PLUS
loans should remain the same.)
If Congress retains the PLUS Loan program,
policymakers should also do the following:
1. Prohibit institutions from including
Parent PLUS loans in financial aid
award letters. Parent PLUS loans
should never be packaged anywhere
within a student’s financial aid award
letter. Institutions should be encouraged to adopt the Education
Department’s Financial Aid Shopping
Sheet as their aid letter. This common
disclosure allows students to understand their financial aid packages and
gives them the ability to compare their
packages among institutions. PLUS
loans are only mentioned as a financing
option on the Shopping Sheet, and
students are encouraged to contact
their financial aid offices for more
information.
2. Release data on the Direct PLUS
loan program including disaggregating data on Grad PLUS/Parent PLUS,
lifetime default rates, and cumulative
default rates. The Education Department should release more detailed
information on PLUS loans, broken out
by loan type (Parent versus Grad PLUS)

13

14

The Parent Trap

with overall information about institution-level performance. Right now
policymakers are operating blind when
it comes to understanding the extent
to which PLUS loans are creating a
problem. Without better information, it
is difficult to craft thoughtful solutions.
The Education Department should
release the following data by institutions, sector, and overall:
a. PLUS loan lifetime (20- or
30-year) default rates, separated
by Grad and Parent PLUS
b. PLUS loan cumulative default
rate data by cohort starting with
the year 2007, separated by Grad
and Parent PLUS

The Parent Trap

3. Consider including Parent PLUS loans
in Cohort Default Rate calculations. At
minimum, the Education Department should
publish 3-year PLUS Loan default rates by institution. In addition, the Education Department
should explore whether institutions should be
held accountable for the repayment of Parent
PLUS loans, by including these loans in the
institutions’ Cohort Default Rate calculations.
It may not be feasible for the Education Department to hold institutions accountable for
whether a parent repays. But if colleges are
charging so much that students are exhausting
their federal student loans and their parents are
subsequently taking on tens of thousands of
dollars in debt they cannot afford, institutions
need to be held accountable for defaults in
some way.

This would be a move in the wrong direction.
It does not make sense to provide parents access to IBR with loan forgiveness because the
parent already knows what his income is and
will be, at least compared to the much more
uncertain future earnings of a student. That allows for significant adverse selection problems
where parents who know their incomes are
low enough that they would have their debt
forgiven would be inclined to borrow the most,
while higher income parents – those who

Since the PLUS loan changes in
2011, many colleges and universities have been faced with a harsh
financial reality: it will be difficult
for economically disadvantaged
parents to obtain a PLUS loan.
While colleges and universities have criticized
the Education Department for making abrupt

changes to the PLUS credit check, the Department was right in trying to better determine the
financial health of a parent before issuing loans.
The PLUS loan program needs further reform
to ensure students still have access to college,
but parents aren’t borrowing well beyond their
means. Many other federal programs exist, from
the Pell Grant to Stafford loans, to help students
pay for college. Students should not be expected
to finance higher education by burdening their
parents with too much debt.

References

Why the Terms of a PLUS Loan Should Remain the Same
Instead of reforming the PLUS loan program
overall, advocates and some policymakers may
argue that the solution is to make the loans
more flexible and more generous for parent
borrowers rather than restrict eligibility for the
loans. They might argue that parents should
be able to repay via Income-Based Repayment
(IBR) or transfer the debt to the student.

Conclusion

would fully repay – borrow the least. Similarly,
lending to parents is not premised on a future
increase in wages like it is for students. If parents do not have enough money to pay back
the loan – which can be ascertained when the
loan is issued – they shouldn’t have received
the loan in the first place. Nor should the loan
be transferred to the student because then
the program just becomes a backdoor way for
students to borrow unlimited debt.
Parent PLUS loans qualify for forbearance, deferment, and consolidation options that should
help parents who face sudden economic hardship, or who need to extend their payments,
and all of those terms are much more generous
than what private lenders provide. Changes to
the terms of the PLUS loans would not solve
the program’s underlying problems.

1. This brief is a compilation of a blog series
featured on New America’s Higher Ed Watch and
public comments submitted by New America to
the U.S. Department of Education during 2013
negotiated rulemaking. It includes additional analysis and recommendations by the author.
See: Rachel Fishman, “Parent PLUS Loans a
Minus for Many,” Higher Ed Watch, October 10,
2012, http://higheredwatch.newamerica.net/
blogposts/2012/parent_plus_loans_should_
be_renamed_as_parent_minus-72630 ; Rachel
Fishman, “Morehouse: A Cautionary Tale in PLUS
Loans,” Higher Ed Watch, November 15, 2012, http://
higheredwatch.newamerica.net/blogposts/2012/
morehouse_a_cautionary_tale_in_plus_loans74207; Rachel Fishman, “Voices from the Front
Lines of the HBCU PLUS Loan Crisis,” Higher Ed
Watch, June 19, 2013, http://newamerica.net/
blogposts/2013/voices_from_the_front_lines_
of_the_hbcu_plus_loan_crisis-86339; Rachel
Fishman, “Parent PLUS Loans: A No-Strings-Attached Revenue Source,” Higher Ed Watch, July
17, 2013, http://newamerica.net/blogposts/2013/
parent_plus_loans_a_no_strings_attached_
revenue_source-88022; Rachel Fishman and
Ben Miller, “The Ed Department Blinks on Parent
PLUS Loans,” Higher Ed Watch, August 16,
2013, http://newamerica.net/blogposts/2013/
the_ed_department_blinks_on_parent_plus_
loans-89907; Rachel Fishman, “Should Secretary
Duncan Apologize to For-Profits for Parent PLUS
Loan Debacle?” Higher Ed Watch, October 9,
2013, http://newamerica.net/blogposts/2013/
secretary_duncan_should_apologize_to_for_
profits_for_parent_plus_loan_debacle-94130.
See also: New America Foundation, Comments
on Request for Negotiated Rulemaking FR DOC
#2013-11287: http://www.regulations.gov/#!documentDetail;D=ED-2012-OPE-0008-0861.
2. Laura Diamond, “Morehouse College Cuts
Spending After Enrollment Drops,” The Atlanta
Journal Constitution, October 18, 2012, accessed
November 14, 2012, http://www.ajc.com/news/
news/morehouse-college-cuts-spending-after-enrollment-d/nSgt8/.

3. U.S. Department of Education, U.S. Department
of Education Office of Postsecondary Education
Public Hearing, June 4, 2013, available at: http://
www2.ed.gov/policy/highered/reg/hearulemaking/2012/transcript-ga060413.pdf.
4. Nick Anderson, “Tighter Federal Lending
Standards Yield Turmoil for Historically Black
Colleges,” The Washington Post, June 22,
2013, accessed December 5, 2013, http://
articles.washingtonpost.com/2013-06-22/
local/40131925_1_federal-loans-federal-plus-howard-s.
5. Libby Nelson, “Cracking Down on PLUS Loans,”
Inside Higher Ed, October 12, 2012, accessed
December 28, 2013, http://www.insidehighered.
com/news/2012/10/12/standards-tightening-federal-plus-loans.
6. “History of Student Financial Aid,” FinAid,
accessed November 7, 2013, http://www.finaid.org/
educators/history.phtml.
7. Education Amendments of 1980, H.R. 5192, 96th
Congress.
8. U.S. House of Representatives, Committee on
Education and Labor, Higher Education Amendments of 1992: Conference Report (H.Rpt. 102-630),
Washington: Government Printing Office, 1992.
9. The interest rates on all student loans, including
PLUS loans, are slated to change starting with
Academic Year 2013-14. With the passage of the
Bipartisan Student Loan Certainty Act of 2013, rates
will be fixed yearly according to the rate on the
10-year Treasury note, plus a markup depending on
the loan. This means that for AY 2013-14, the interest
rate on Parent PLUS loans will be 6.41 percent. For
more information, see: Jason Delisle and Clare
McCann, “Unexpected $8 Billion Boon to Student
Loan Borrowers,” EdCentral (blog), November 6,
2013, http://www.edcentral.org/unexpected-8-billion-boon-to-student-loan-borrowers/.

15

16

The Parent Trap

10. Starting in 2011-12, parents are required to fill
out a FAFSA to obtain a Parent PLUS loan.
11. This refers to the average price of attendance
for full-time/full-year students, see: Table 1 in Sean
Simone, David Radwin, Jennifer Wine, Peter
Siegel, and Michael Bryan, 2011-12 National
Postsecondary Student Aid Study: Price Estimates
for Attending Postsecondary Institutions (Washington, DC: National Center for Education Statistics,
Institute of Education Sciences, U.S. Department of Education, 2013), http://nces.ed.gov/
pubs2014/2014166.pdf.
12. Although they do qualify for extended repayment
terms of between 12 and 30 years, as well as
deferment and forbearance terms.
13. Marian Wang, Beckie Supiano, and Andrea
Fuller, “The Parent Loan Trap,” The Chronicle
of Higher Education, October 4, 2012, accessed
October 24, 2013, http://chronicle.com/article/TheParent-Plus-Trap/134844.
14. Rachel Fishman, “Morehouse: A Cautionary
Tale in PLUS Loans,” Higher Ed Watch, November
15, 2012, http://higheredwatch.newamerica.net/
blogposts/2012/morehouse_a_cautionary_tale_in_
plus_loans-74207.
15. Except in rare circumstances, most students
under the age of 24 are considered “Dependent” for
financial aid purposes. In other words, the Department of Education assumes parents will cover some
of the cost of the student’s education, even though
the student may be over 18 and not receiving
any support from parents. Federal loans made to
dependent students have smaller caps than those
loans made to “Independent” students. For more
information, see: “Filling Out the FAFSA: Dependency Status,” Federal Student Aid, an Office of the
U.S. Department of Education, accessed December
9, 2013, http://studentaid.ed.gov/fafsa/filling-out/
dependency.
16. This increased limit is what the student would
have been able to borrow were they an independent
student.
17. Libby Nelson, “Cracking Down on PLUS Loans,”
Inside Higher Ed, October 12, 2012, accessed
December 9, 2013, http://www.insidehighered.
com/news/2012/10/12/standards-tightening-federal-plus-loans.
18. The data for this analysis came from “Title IV
Program Volume Reports,” Federal Student Aid: An
Office of the U.S. Department of Education, http://
studentaid.ed.gov/about/data-center/student/
title-iv.
19. In addition to the credit changes to PLUS loans,
there may be many other reasons for the large
enrollment decline at for-profits including the
recovering economy, increased regulation of the
sector, and bad publicity.
20. In this analysis, the data on enrollment from
2012 and 2013, during which time for-profit enroll-

ment dropped significantly, are not yet available.
Over the next two years, further analysis of enrollment data must be done to understand how both
the for-profit and HBCU sectors’ share of enrollments and recipients changed.
21. Net Price for students from family incomes of
$0-$30,000 for 2011-12. “College Navigator: ITT
Technical Institute-Indianapolis,” National Center
for Education Statistics, accessed December 2,
2013, http://nces.ed.gov/collegenavigator/?q=itt+tech&s=all&pg=4&id=151519#netprc.
22. “College Navigator: ITT Technical Institute-Indianapolis,” National Center for Education
Statistics, accessed December 2, 2013, http://nces.
ed.gov/collegenavigator/?q=itt+tech&s=all&pg=4&id=151519#netprc.
23. “College Navigator: University of Phoenix-Phoenix Campus,” National Center for Education
Statistics, accessed December 2, 2013, http://nces.
ed.gov/collegenavigator/?q=university+of+phoenix&s=all&pg=4&id=105516.
24. “College Navigator: The Art Institute of
Atlanta,” National Center for Education Statistics,
accessed December 2, 2013, http://nces.ed.gov/
collegenavigator/?q=art+institute+of+atlanta&s=all&id=138813#finaid.
25. The data from this section, unless otherwise
noted, come from a New America analysis of the
National Center for Education Statistics, National
Postsecondary Student Aid Study 12 (NPSAS 12).
For more information on this survey, visit, “National
Center for Education Statistics: National Postsecondary Student Aid Study (NPSAS),” U.S. Department
of Education, Institute of Education Sciences,
accessed December 13, 2013, http://nces.ed.gov/
surveys/npsas/.
26. “Trends in Higher Education: Distribution
of Pell Grant Recipients by Family Income and
Dependency Status, 2011-12,” College Board,
accessed December 13, 2013, https://trends.
collegeboard.org/student-aid/figures-tables/
distribution-pell-grant-recipients-family-income-dependency-status-2011-12.
27. Rachel Fishman, “Morehouse: A Cautionary
Tale in PLUS Loans,” Higher Ed Watch, November
15, 2012, http://higheredwatch.newamerica.net/
blogposts/2012/morehouse_a_cautionary_tale_in_
plus_loans-74207.
28. U.S. Department of Education, U.S. Department
of Education Office of Postsecondary Education
Public Hearing, June 4, 2013, available at: http://
www2.ed.gov/policy/highered/reg/hearulemaking/2012/transcript-ga060413.pdf.
29. Stephen Burd, Kevin Carey, Jason Delisle,
Rachel Fishman, Alex Holt, Amy Laitinen, and
Clare McCann, Rebalancing Resources and Incentives in Federal Student Aid (Washington, DC:
New America Foundation, 2013), 20-21. Note that
those changes were proposed in conjunction with
changes to the terms of IBR.

18

The Parent Trap

New America Education Policy Program
1899 L Street, NW
Suite 400
Washington DC 20036
Phone 202 986 2700
Fax 202 986 3696

www.newamerica.org
www.edcentral.org