Rethinking Federal Lending to Parents

While total federal student loan borrowing has actually been declining for several years amid dwindling enrollments, lending through a federal program for parent borrowers has been on the rise.

The Parent PLUS loan program frequently issues debt to parents with little chance of successful repayment, a report released today finds, and functions as a “no-strings-attached” revenue source for many colleges.

The program issued an average of $16,542 to the parents of 779,000 undergraduates in the 2017-18 academic year and now makes up nearly a quarter of undergraduate debt disbursed by the federal government annually. Parent PLUS loans are typically taken out when students have exhausted all other sources of aid, including federal direct loans.

Concerns about unmanageable loan amounts for parent borrowers have prompted recent legislative solutions. Republicans in Congress have called for new standard lending caps for the parent loan program, which allows borrowing up to the cost of attendance. Democratic lawmakers, meanwhile, have proposed making the loans eligible for income-driven repayment options.

But the report from the Urban Institute and New America argues that proposals from both parties have missed the mark.

Its authors say that lending should be limited to a family’s expected family contribution, a federal estimate of parents’ ability to pay for postsecondary education in a given year that serves as the basis for college aid offers. And they say loan limits should be increased for undergraduate students whose parents would no longer qualify for PLUS loans.

“The Parent PLUS program has sort of strayed from its original intent, which was to provide liquidity for high-asset families who could not cover their expected family contribution with their current earnings,” said Kristin Blagg, a research associate at the Urban Institute’s Center on Education Data and Policy and a co-author of the report. “We know parents are borrowing substantially more than they are able to pay back.”

Blagg and co-authors Sandy Baum, a nonresident fellow at the Urban Institute, and Rachel Fishman, deputy director for research at New America’s education policy program, also propose that institutional default rates should be published for Parent PLUS loans. And they say Congress should assist current borrowers by easing restrictions on bankruptcy for Parent PLUS loans and allowing debt forgiveness for borrowers who have made long-term use of social safety net programs like food stamps.

The report builds on other recent research finding troubling developments in the Parent PLUS program. Fishman has found that the program may actually be exacerbating the racial wealth gap by saddling black parent borrowers with debts they can’t repay. And a Brookings Institution report found last year that the average loan amount and default rates for parent borrowers were both increasing.

Defenders of the loans have argued Parent PLUS is an important tool to support college access. But the report from Urban and New America finds that the program was designed originally as a liquidity tool for middle-income families.

Congress created what came to be known as the Parent PLUS loan in the 1980 reauthorization of the Higher Education Act in response to demands for increased federal student lending. It was intended for families who needed assistance covering their expected family contribution. In 1992, Congress removed caps on lending, allowing parents to borrow up to the full cost of attendance after passing a minimum credit check, spiking loan rejections and causing huge disruptions for historically black colleges in particular.

A 2014 federal rule-making process led to lower eligibility requirements for Parent PLUS loans, and disbursements through the program have continued to increase since then compared to direct lending to undergraduates.

The report finds that more that 62 percent of borrowers in 2015-16 exceeded their expected family contribution. And 11 percent of borrowers that year borrowed more than $15,000 above their EFC.

A Democratic proposal in the Aim Higher Act would make all PLUS borrowers eligible for income-driven repayment. The authors of the report found that would create unintended consequences, and that high-income families would be the largest beneficiaries.

But the report finds that a Republican proposal to cap parent lending at $12,500 annually wouldn’t sufficiently address overborrowing for the lowest-income borrowers. For parents with a zero-dollar EFC, borrowing any amount of money for their child’s education would be too much, said Fishman of New America.

“Any amount of debt would be more than they could reasonably handle,” she said.

Mark Kantrowitz, a financial aid expert and publisher of Savingforcollege.com, said limiting borrowing to a parent's expected family contribution wouldn't do enough to limit overborrowing. He suggested that lending limits be pegged to a measure like adjusted gross income instead.

Fishman said any metric that measures ability to repay would be useful but argued the expected family contribution was fairly straightforward.

"EFC isn't perfect," she said. "But some of these other measures might be imperfect, too."

The Trump administration has identified capping Parent PLUS lending as a top priority for reauthorization of the Higher Education Act. Last week Diane Auer Jones, the Education Department’s principal deputy under secretary, reiterated the administration’s commitment to new loan limits.

Ben Miller, vice president for postsecondary education at the Center for American Progress, said the report showed the problems that arise from a primarily debt-based system of funding higher education. But he said efforts by Congress to reform the Parent PLUS program would likely run into budgetary impediments as Democrats look to advance their own priorities in a new higher ed law such as new spending on college affordability. That may seem counterintuitive, but under budgeting rules, the PLUS program generates revenue for the federal government. A Congressional Budget Office analysis found that the PROSPER Act's proposed reductions in lending would mean billions in new federal spending.

“Anything that’s done to reduce Parent PLUS eligibility will come at a substantial budgetary cost,” Miller said. “In a world where you may be fighting for increased Pell or a federal-state partnership, the optics of spending money to take away a benefit aren’t great.”