Morehouse: A Cautionary Tale in PLUS loans

Morehouse, a private, all-male, liberal arts college, is one of the most prestigious historically black colleges in the nation. With a mission to develop men with disciplined minds who will lead lives of leadership and service, and a notable alumni list that includes Dr. Martin Luther King, Jr., Morehouse attracts some of the best and brightest. So why has this esteemed, selective institution of higher education suddenly been forced to furlough faculty and staff? The answer proves to be both surprising and unsettling: Parent PLUS Loans.

As I’ve written here before, Parent PLUS loans have increasingly become a burden for many families. While the federal government issues these loans, they are most similar to private loans and require parents to pay a high, fixed interest rate of 7.9 percent (plus a 4 percent origination fee, for a total APR of about 9 percent). Parents borrow these loans on behalf of their college-going children, and must meet minimal standards to qualify (more minimal than for private loans).  Unlike federal Stafford or Perkins loans, there is no cap on PLUS loans. Parents may borrow up to the full “Cost of Attendance” (COA) of the institution.

Here’s the problem: Morehouse is expensive. Its COA for 2011-2012 was around $44,000. Even when taking into account federal, state, and institutional financial aid, its average net price was $23,324. For students from families with incomes at or below $30,000, the net price was $23,036. Think about that. Some families are paying more than what they make in one year to send their children to Morehouse.  And Morehouse attracts a significant percentage of low-income students—almost 50 percent receive Pell Grants.

So how do you cover $23,000 when you don’t have the money? Through student loans. First, a student will exhaust his federal Stafford loans, which are capped at $5,500 for his first year. Then, if the institution has the resources, the student may receive a Perkins loan for up to $5,500. That still leaves about $12,000 to be accounted for, and this is where a Parent PLUS loan comes into play, especially if a family has no credit history to receive a private loan. Assuming that a student is on track to graduate, the student and his parents might accumulate over $90,000 of federal student loan debt.

Recently, the Department of Education tweaked the minimal credit standards for PLUS loans. It used to be that 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. Now, the department added to that list any unpaid charge-off accounts and accounts in collections within the past five years. This small change has resulted in a relatively dramatic increase in loan denials—38 percent this year, compared to 28 percent last year. And it has hit Morehouse even harder.

According to the Atlanta Journal Constitution, eight percent of Morehouse students who pay a deposit to attend usually don’t enroll. This year, with the changes made to PLUS, that number doubled to 16 percent, or 125 fewer students. This caused a budgetary shortfall that has forced Morehouse to furlough its faculty and staff at least five days. Morehouse’s Provost, Willis Sheftall commented, “This is a challenge, no question about that. But it is not a crisis.”

It is a crisis, though. A crisis for students who are already borrowing the maximum allowed. And increasingly, a crisis for parents who are turning to PLUS loans to make up the difference.

Parent PLUS loans should be a cautious loan of last resort. Instead they have become the loan of first resort at institutions with large financial aid gaps. Even more problematic, Morehouse packages its PLUS loans within its financial aid packages, sometimes to the tune of more than $32,000, making it seem like this money is a readily-available guarantee to families. This means Morehouse has been balancing its budget on the assumption of PLUS loan disbursements made to the most vulnerable families—a risky strategy that has backfired this year.

PLUS loans should never be the strategy for maintaining access in the face of rapidly rising college costs. After all, is it true access if students and parents are being saddled with enormous amounts of debt?  As the PLUS spigot turns more towards trickle, it’s time for high-priced institutions that rely heavily on PLUS loans to focus on driving down their costs. In the meantime, institutions must stop including PLUS loans in their financial aid award packages, even if that means a student decides to attend another school that is more affordable.