The Growing Loan Burden for Parents of College Students

Parents are taking out bigger loans to pay for their children's college education, a new report finds, and having worse outcomes repaying that debt.

November 29, 2018
 
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A loan program offered to parents financing their children’s college education has been the target of repeated calls for tighter restrictions on eligibility. And a report released Wednesday by the Brookings institution on Parent PLUS loans adds new fuel to arguments for restricting the program.

The report finds that the average loan amount taken out by parent borrowers has more than tripled in the last quarter century, according to the report. And parents with six figures in loan debt make up a growing share of borrowers entering repayment.

Repayment rates have declined, meanwhile, and more parents are defaulting on loans as they take out debt to finance their children’s degrees at institutions with poor repayment outcomes. While parent borrowers on average have very low default rates on the loans, those aggregate numbers mask negative trends and poor outcomes at particular types of colleges, the report says.

“We’re in this situation where parents, in order to send their kids to schools they want to attend, are taking out loans that some of them clearly can’t afford to repay. And that seems like a terrible choice,” said Adam Looney, the director of the Brookings Center on Regulation and Markets, who co-authored the report along with Vivien Lee, a senior research assistant at Brookings' Hutchins Center on Fiscal & Monetary Policy.

Those concerns are magnified because Parent PLUS loans don’t come with the same kinds of protections as federal undergraduate debt, like income-based repayment and loan forgiveness.

In 1990, the average parent borrower took out $5,200 annually. In 2014, that number was $16,100, according to the report.

And the five-year default rate jumped from 7 percent in 2000 to 11 percent in 2009.

But parents face only a basic eligibility check for Parent PLUS loans; they can be more than $2,000 delinquent on other loan debt and still qualify. And there are no caps on lending to finance their child's education.

The report is the latest of several papers produced by Looney examining student borrowing trends based on administrative data from the National Student Loan Data System.

Parent borrowing has often flown under the radar relative to undergraduate student loan debt. There isn’t much good data on borrowers, and the loans make up a sliver of the overall federal student loan portfolio, said Rachel Fishman, deputy director for research at New America’s Education Policy program.

But the loans are instrumental for many students to access colleges, especially historically black institutions. When the Obama administration attempted to tighten eligibility standards on Parent PLUS loans in 2011, it led to loan denials for thousands of families and intense backlash from black colleges. Many of the families who take out the loans don't have other options after their student exhausts their federal financial aid eligibility. They likely won't, for example, qualify for private student loans with better rates.

Although those changes were carried out clumsily, Fishman has written that more fundamental reform of the program is still needed. In a paper earlier this year, she said the program exacerbates the racial wealth gap by saddling many black families with debt they’re unable to repay. The Brookings report only adds to those concerns, she said.

“The PLUS program is the only undergrad loan program where loans have been increasing year over year even as enrollments decline,” she said. “The result, as Looney and Lee point out, is that average loan balances for PLUS have increased dramatically.”

Many institutions package Parent PLUS loans as part of a student’s financial aid award letter, a practice faulted by Fishman and other critics. And even more have come to rely on the loans as a source of revenue.

The Brookings paper finds the institutions with the worst repayment rates on parent loans were for-profit institutions -- especially those investigated for fraudulent and deceptive practices -- and institutions serving a high share of underrepresented minority students.

Parents of for-profit-college students had paid back 57.7 percent of their aggregate loans five years after entering repayment in 1999. For the cohort entering repayment 10 years later, parents had paid back only 26.3 percent of loan debt within five years. But half of colleges with the worst repayment rates were public or nonprofit institutions.

Groups representing black colleges have argued their members are trying to address affordability while serving a student population with many needs. And they say the PLUS program should not be restricted without addressing the greater need for financial aid among their student bodies.

Mark Kantrowitz, an expert on student aid, said that the growth in Parent PLUS over the last 25 years roughly matches tuition inflation. The growing rate of loan defaults was more concerning, he said.

“Part of the problem is the Parent PLUS loan program is the safety valve for when students reach the Stafford loan limits,” he said.

Kantrowitz has argued that a slowdown in the growth of average student loan debt through the undergraduate Stafford program indicates many borrowers are hitting lending limits -- and parents are borrowing more in response.

Looney said the numbers he found showed the need for more federal data on parent borrowers.

"There are a lot of things that the federal government can do," he said. "One initial step would just be transparency to have a better sense of who is being successful paying their loans and who isn't."

Recent legislative proposals introduced by Republican and Democratic House lawmakers to update the Higher Education Act have taken contrasting approaches to Parent PLUS. The PROSPER Act, House Republicans' bid to reauthorize the higher ed law, would cap aggregate parent borrowing at $56,250 while slightly raising lifetime lending limits for undergraduate borrowers. The Aim Higher Act, which Democrats introduced over the summer, would make parent loans eligible for income-driven repayment.

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