Reshaping Parent PLUS Loans

The use of Parent PLUS loans -- federal loans for parents of dependent undergraduates --is increasing, even as student borrowing is declining. Parent PLUS loans were originally designed to provide liquidity to high asset families who could not cover their expected family contributions (EFCs) with current income. But policymakers have pushed the Parent PLUS program past this original mission. Now, just 38 percent of Parent PLUS loans are equal to or less than the family’s EFC, and loans are too frequently issued to borrowers who cannot repay. Although Parent PLUS repayment outcomes are stronger than student repayment outcomes, some parents struggle with these loans. We argue that stopgap solutions, such as expanding income driven repayment (IDR) for Parent PLUS borrowers, will only worsen the problem, providing large subsidies to affluent families. We propose returning to the program’s original intent, lending limited amounts to parents who can repay and providing additional financial aid directly to low-income students, rather than to their parents.

Policymakers must develop solutions for current parent borrowers who cannot afford their payments, while restoring stricter provisions for new Parent PLUS borrowers. We recommend that Congress revise the Parent PLUS program to do the following:

• Limit Parent PLUS eligibility to the parents’ EFC. PLUS loans should go only to parents who have the means to repay them and should be limited to the parents’ EFC. Other provisions, such as the required check for adverse credit history, should also remain in place.
  
• Increase student loan limits for the lowest income students, whose parents will not have access to PLUS loans. Dependent students with $0 EFCs should get automatic access to the independent student loan limits because their families have no ability to help pay for their education. This would provide an extra $4,000 to $5,000 a year in unsubsidized loans for undergraduate students and would be payable through IDR plans.
  
• Exclude Parent PLUS borrowers from IDR. Borrowers who use the Parent PLUS loan program moving forward should have access to standard, graduated, and extended repayment options, as well as consolidation. Parent PLUS borrowers should not have access to IDR plans or to forgiveness programs.
  
• Hold institutions accountable for Parent PLUS lending. Institutions that encourage both the parent and the student to borrow should be held accountable for the outcomes of both loans. We recommend that policymakers develop a cohort default rate (CDR) measure for Parent PLUS loans to discourage institutions from pushing parents to rely on PLUS loans and to ensure that those who borrow repay their loans. The Parent PLUS loan CDR should be separate from the student loan CDR because they are based on different.

Lax Parent PLUS policies may have put some borrowers in a precarious financial position, and policymakers should provide some relief for these borrowers. We recommend that policymakers allow the following provisions for current Parent PLUS borrowers:

• Ease restrictions on the discharge of Parent PLUS loans in bankruptcy. A Parent PLUS borrower has likely reached his or her maximum earning capacity and is unlikely to see substantial increases in income or assets (unlike most student borrowers). Therefore, policymakers could lower the standard for the discharge of current Parent PLUS loans in bankruptcy — which is as stringent as the standard for student loans — without introducing the moral hazard some argue might be present for discharge of student loans.
  
• Allow forgiveness of debt for Parent PLUS borrowers with long-term participation in social safety net programs. Bankruptcy is more common among middle-class earners than among low-income households (Price and Dalton 2007). An additional way of offering relief to current Parent PLUS borrowers would be to allow the discharge of some or all of the debt for borrowers who have relied on a social safety net program, such as the Supplemental Nutrition Assistance Program, for a substantial period (e.g., five years) during repayment. These borrowers have already demonstrated significant financial need and inability to pay down the debt.
  
• Permit continued use of income-contingent repayment, after consolidation, for those who borrowed under current rules. Current Parent PLUS borrowers should not be cut off from their existing option to access income-contingent repayment, with payments set at 20 percent of discretionary income over 25 years, if they borrowed when that option was available. But once the EFC borrowing limit is imposed and ability to pay is added to the credit check, new Parent PLUS borrowers should not be permitted access to this plan.

Read the full report here.