What We Need to Know About Parent PLUS Loans

Recently, the U.S. Department of Education convened the first of three “Program Integrity and Improvement” negotiated rulemaking sessions to address a range of topics, including what credit standards should be in place for judging who should receive a Direct PLUS loan. The definition of adverse credit for receiving a PLUS loan was added as an issue for negotiated rulemaking after the Department changed the criteria in 2011, causing an increase in denial rates that left many students scrambling. As a result, several institutions have called for the Department to revert back to the pre-2011 credit standards. You can read about the Parent PLUS loan changes here.

The first rulemaking session revealed a lot of tensions about the PLUS program, with representatives from colleges that rely heavily upon these loans arguing about the need to revert back to the old, looser standards. Consumer, legal, and student advocacy representatives, meanwhile, raised concerns about lending high-interest, inflexible federal PLUS loans out to lower-income borrowers with poor credit histories. The one thing both sides did agree upon is how difficult it will be to make decisions about what to do with the Parent PLUS program without more data.

It became clear at the first meeting of the rulemaking committee that the negotiators are operating blind when it comes to diagnosing problems with the Parent PLUS program and creating fairer adverse credit standards. Like the rest of higher education, the PLUS loan program would benefit from more publicly available data. But there’s a difference between simply throwing more facts and figures out and getting meaningful information that will help drive decision-making and understand how the program affects borrowers and institutions. Given the importance of understanding PLUS loan rejection and default rates, one of the first orders of business at the negotiated rulemaking session was for many committee members to request this data from the Department. Committee members argued that it would be difficult for them to negotiate without better understanding the effects of the adverse credit change.

With that in mind, what figures do negotiators really need to inform their policy choices? And how will the Education Department be able to get that data?

PLUS loan volume changes tell us nothing about changes in denials or approvals

What do we know? The Office of Federal Student Aid regularly publishes and revises “Title IV Program Volume Reports” by quarter. These reports highlight increases and decreases in PLUS loan disbursements and recipients. It’s the only national, disaggregated, and easily-downloaded data we have about PLUS loans by institution. I used Q3 data for the purposes of my analysis in my policy brief The Parent Trap, but recently re-ran portions of the analysis with revised Q4 data (see tables below).[1. Methodology: I merged cumulative student loan volume data from AY 2005-06 to 12-13. I dropped foreign institutions, those labeled “other” in institution type. I ensured that all HBCUs were correctly labeled. I dropped all OPEID duplicates that had separate unitids. I dropped administrative units with no data values. Please note: I did not drop schools that closed during the AY 2005-06 to 12-13 time period as I wanted longitudinal data and thought it was important to reflect all disbursements and recipients despite if a school eventually closed.] The story is largely the same, there has been a significant decline in PLUS loan disbursements and recipients since 2011 at high net-price institutions like for-profits and historically black colleges and universities (HBCUs). Additionally, these sectors, and the nonprofit sector, are overrepresented in PLUS loan volume compared to their enrollments.

What’s missing? The loan volume data are important for showing growth and contraction in the Parent PLUS program. But they don’t tell us anything about the denial rate for parents applying for loans. Surely the sharp volume decline post October 2011 has a lot to do with increased PLUS loan rejections, but how much of the decrease in loan disbursements was due to changes in the credit standards versus other factors cannot be answered. Here’s an example that highlights the problem: The for-profit sector has been shedding enrollments over the past couple of years, so does that explain the decline in PLUS recipients and disbursements? Or was is the decline more directly linked with the changes to the definition of adverse credit?

Where can the Department get rejection rate information? The Department should be able to get this data through the Common Origin and Disbursement (COD) system, but it may require some changes to the stored data. In order to track this information correctly, every time a credit check is run the Department would need the social security number of the student that the loan is being taken out for and the institution where the student is attempting to go. This information should accurately be captured for current PLUS borrowers, but this wasn’t always the case, which may lead to some messy data. The Department would also have to determine what time period it was looking at to define the cohort for denials, and be transparent about that choice.

While COD may be able to provide the Department with information about what type of adverse credit conditions caused the application denial, it may not know what type of debt caused the problem. In other words, the Department may know that an applicant was denied because of a debt that was in collections, but not know whether that was from a medical bill, utility bill, or something else. If this information were made available, the rulemaking committee would better understand how much the increase in denials was related to the change to adverse credit criteria.

PLUS loan default rates

What do we know? Every year, the President’s budget request contains projected PLUS loan lifetime default rates. Currently, for FY 2015, the cohort lifetime dollar default rate for Parent PLUS loans is 8.63 percent, which is lower than subsidized Stafford loans (22.17 percent) and unsubsidized Stafford undergraduate loans (22.82 percent).  While Parent PLUS loans experience a lower projected default rate, keep in mind that compared to Stafford loans, to receive a PLUS loan a parent borrower has to undergo a credit check. The Parent PLUS default rate is high compared to other consumer credit lines that have more stringent underwriting standards like mortgages or auto loans.

What’s missing? FY 2015 is the first year that the projected default rates for PLUS loans have been disaggregated to reflect the difference in the Parent PLUS and Grad PLUS loan programs. In years past, the projected rate combined both types of PLUS loans. This means we do not know how the FY 2015 figure compares to past years. That’s problematic because the FY 2015 projected rate of 8.63 percent is based off of borrowers that passed the more stringent credit check put in place by the Department in 2011. Since in previous years the data were not disaggregated between Grad PLUS and Parent PLUS loan defaults, there is no way of knowing if the projected rates leading up to the change to the credit check in 2011 were higher.

Additionally, there are no real-time (as opposed to projected) default data that report down to the institution or sector level. PLUS loan defaults also aren’t included in official Cohort Default Rate calculations. Default data would go a long way in explaining the Department’s reasoning—especially if some sectors or institutions have parents who default at high rates, and if the defaults were much higher before the change.

Where can the Department get this information? The Department should be able to calculate this data through the National Student Loan Data System (NSLDS). The data would be a bit messy because the Department would have to construct a cohort to calculate a default rate (i.e. by those who received a loan all in the same year or when loans entered repayment due to either graduating, withdrawing, or dropping below half-time enrollment status) and how long to track loans for (i.e. 3-year default rate, 4-year default rate). As long as the Department was transparent about the definition of the cohort, there is absolutely no reason not to provide this data to the negotiated rulemaking committee. What will remain impossible for the Department to determine is whether borrowers with charged-off debt or debt in collections accounted for a significant amount of PLUS defaults before they decided to add those two characteristics to the adverse credit check.

The Department’s negotiators made it seem like it would be difficult to give the committee the data. But given the millions of dollars at stake, the Department cannot simply hide behind complexity to avoid furnishing the necessary data. As long as the Department is transparent about how the rates are calculated, the benefit of using this data to create a fairer definition of adverse credit outweighs the risk that the data might have caveats attached.