Dangers of PLUS Loans
If you are a parent considering taking out a PLUS loan for your graduating high school senior to attend college, you are almost certainly making a mistake. The fact is that if you can’t afford a college without a PLUS loan, then the college is simply not affordable.
Yes, this isn’t fair. It’s hard to say no to your child who has worked so hard to get into college. But you are the adult in this situation and you need to know that the government limits the amount of money students can borrow through the Direct Student loan programs for a reason. PLUS loans are pretty much financial time bombs with few options for defusing.
PLUS Loans History
Let’s start with a little history. Up until 1993, PLUS loans had a cap of $4,000 a year with an aggregate limit of $20,000. Essentially, such limits meant they were designed for parents to use to get through unexpected financial hardships while their students were in college. Even back then, $4,000 wasn’t going to cover the cost of tuition. However, it would make a difference if there was a family emergency. A PLUS loan provided the family with some extra money until the following year’s financial aid application.
In 1993, the program changed. Parents could now borrow up to the entire amount of the cost of attendance. And the really scary part is that parents don’t have to demonstrate any ability to actually repay the loan. They just have to have to prove a rather limited credit worthiness. This means they haven’t been late on their current payments. It really doesn’t matter how much money they make.
Ability to Repay isn’t Considered
And the colleges are good with this. After all, they aren’t actually the institutions lending the money. When the government tried to tighten the requirements for PLUS loans a few years ago,
…Catherine Hurd of Johnson C. Smith University publicly criticized the Department’s changes to the PLUS loan credit criteria. She described many students who could no longer enroll in the university without PLUS loans since they didn’t have enough money upfront to cover their costs. One story she shared was of a homeless parent who was denied a PLUS loan. “She agreed to send her weekly paycheck to Johnson C. Smith until the balance was paid, and that she would continue to remain homeless until she could get her feet back on the ground,” Hurd explained.
A homeless person could take out a loan. What are the chances of her being able to repay the loan? I’m pretty sure the college wasn’t offering any sort of guarantees as far as future incomes for their students. The reality is that can’t even guarantee their students will even graduate.
The New America Foundation has a report that every parent considering a PLUS loan should read, The Parent Loan Trap. It explains the basic problem of paying for college with PLUS loans. Students receive loans because theoretically, going to college will dramatically improve their economic situation and they will be able to repay their loan. The loan allows them to change their situation.
When parents take out the loan, they aren’t receiving any sort of economic benefit. Nothing in their situation will change to allow them to repay the loan. They just now owe more money.
ProPublica and The Chronicle of Higher Education in No Income? No Problem! How the Gov’t Is Saddling Parents with College Loans They Can’t Afford
…found that Plus loans can sometimes hurt the very families they are intended to help: The loans are both remarkably easy to get and nearly impossible to get out from under for families who’ve overreached. When a parent applies for a Plus loan, the government checks credit history, but it doesn’t assess whether the borrower has the ability to repay the loan. It doesn’t check income. It doesn’t check employment status. It doesn’t check how much other debt — like a mortgage, or other student-loan debt — the borrower is already on the hook for.
The truth is that for some families, not taking out a loan will mean that their students will have to start at a community college. Of course, that’s not what most hard working students want to hear or think they deserve. And it’s certainly not fair.
Colleges Don’t Suffer When Parents Default
But PLUS loans are dangerous. An increasing number of colleges list them on student’s financial aid awards as a way of showing the current amount owed by families as being “0”. Never mind parents will have to start repaying immediately and then borrow again for the next three years. Too often, the parents are being asked to take out the equivalent of a car loan every year for four years.
Take some time to read the latest Trends in Student Aid report. For both subsidized and unsubsidized loans, the average amount per borrower has actually slightly decreased since 1995. The number of student borrowing has increased, but the limits are the same.
The average PLUS loan, however, has increased from $9,266 in 1995, to $15,254 in 2015. I suppose the good news is that only about a tenth of the number of people take out PLUS loans compared to Direct loans.
Hopefully, this is because most people realize the dangers of PLUS loans. Richard Fossey, Professor at University of Louisiana, observes: “Of course it is madness for parents to pay a fifth of their discretionary income for 25 years in order for their child to go to college. There are lots of college options that don’t require that kind of sacrifice.”
Do Your Research
Ultimately, there will be times when it makes sense for a family to take out a PLUS loan. But this should only be done after carefully considering the risks and available alternatives. To give you some idea of what you might want to pay attention to, take a look at the table below. It lists 95 colleges where more than 10% of the students have PLUS loans taken out on their behalf with an average of $20,000 or more.
It also includes the default rate for federal loans for undergraduates. This gives you some indication if graduates are able to earn enough money to pay back their loans. If students are defaulting on their own loans, what are the chances of them being able to help their parents repay the PLUS loans?
Colleges with the Most PLUS Loans