After months of negotiations, the U.S. Department of Education’s Program Integrity Negotiated Rulemaking Committee last week came to a tentative consensus about the definition of adverse credit for PLUS loans. This agreement on PLUS loans is a clear middle-ground approach designed to assuage the institutions that experienced significant revenue loss due to recent changes to the program without angering the consumer and student advocates who are concerned that low- and middle-income families are getting in over their heads with a loan product that has very few consumer protections. Still, this regulatory compromise should only be a short-term fix until more robust statutory changes can be made to the program through reauthorization of the Higher Education Act (HEA).
First, it’s important to note that it’s possible, though highly unlikely, that the Department will abandon the agreed upon language. That’s because the committee was only able to come to tentative consensus on four out of the six issues being discussed during this session of negotiated rulemaking. Two issues—“State Authorization of Distance Education” and “Cash Management” reached a stalemate. This means that the Department can now propose whatever regulatory language it wants on any of the issues discussed—including the definition of adverse credit for the Direct PLUS loan.
However, given that consensus from various stakeholders was reached on PLUS, it’s likely that the issue is settled for now. The Department and the negotiating committee should be praised for not reverting back to the pre-October 2011 standards—where a PLUS borrower could have an account in collections or charged off and not be considered to have an adverse credit history. However, I (along with many others) am disappointed that only small tweaks were made to the definition that will make no difference for families who too easily get in over their heads on these loans.
In the Department’s new proposal, PLUS borrowers fail the credit check if they have one or more debts with a total combined outstanding balance greater than $2,085 that are 90 or more days delinquent, charged off, or in collections in the past two years or have been the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a debt under title IV in the past five years. (You can see the exact changes to the regulatory language here.) Unfortunately, these small tweaks still put the Department in the difficult position of offering a subprime loan to some parent borrowers in tandem with the power to collect on that loan through wage, tax refund, and/or social security garnishment. This definition, in other words, enables the Department to be a predatory lender.
If the federal government is going to continue to be in the business of lending money through the Parent PLUS loan program, there needs to be more consumer protections on the loan product and more accountability for colleges and universities that have high PLUS cohort default rates (CDRs). Given that the Department and Congress are currently engaged with Higher Education Act (HEA) reauthorization proposals, here are three changes they should consider related to PLUS loans and college affordability:
1) Add an “ability to repay” measure to the credit check for PLUS loans. Looking at someone’s adverse credit history is divorced somewhat from whether or not someone has the ability to repay a loan. Adding an ability to repay measure would be a much fairer standard, ensuring that parents are able to have access to a loan without borrowing beyond their means.
2) Publish Parent PLUS CDRs by institution and hold institutions accountable to those rates. Parent PLUS loans currently have no accountability and no cap making it easier for colleges to fill financial aid award letters with PLUS loans up to the full cost of attendance. For this reason, the Department should publish institutional Parent PLUS default rates. Just like with current institutional CDRs, the institution should face sanctions if its Parent PLUS CDR is over 30 percent, including eventual loss of eligibility to offer PLUS loans.
Institutions will argue that they have no control over parents who take on these loans and then refuse to pay them back. But 30 percent is such an egregiously high default rate, it’s indicative that institutions are packaging the loans within financial aid award letters for families that clearly can’t afford them, and not doing an adequate job explaining PLUS loan repayment requirements and options—including making parents aware that they can consolidate their PLUS loans in order to qualify for Income-Contingent Repayment.
3) Expand grant aid for low-income students. PLUS loans are a terrible form of federal financial aid to low-income families. The federal government should instead expand the Pell Grant program. The best way to do this is to redirect the more than $180 billion of poorly-targeted higher education tax benefits into Pell Grants. If we get rid of these tax benefits, the Pell Grant maximum could be increased substantially. The savings from redirecting the tax benefits would ensure that this increase to Pell wouldn’t cost the federal government a dime.
HEA reauthorization is most likely years away, but it’s important to start discussing reforms like these now. Parent loans on top of student loans might enable college access, but at what cost to families? More must be done by the federal government to ensure the PLUS loan is a safe product for families, that colleges and universities don’t use these loans to skirt accountability, and that we re-focus better aid options on the families who need them most.
[Cross-posted at Ed Central]