In tomorrow’s Federal Register, the U.S. Department of Education will publish its final regulations for the Direct PLUS loan program. As I wrote previously, the Department’s rules on PLUS loans represent a compromise meant to appease the colleges and universities that experienced significant enrollment decline and revenue loss due to changes to the program in 2011 and the consumer and student advocates who are concerned that low-income parent borrowers may be getting in over their heads with a loan product that has very few consumer protections. Unfortunately, the final rule does not prevent low-income parents from borrowing much more than they can pay back.
The final rule is largely similar to the tentative consensus the Program Integrity Negotiated Rulemaking Committee reached in May about the definition of adverse credit for PLUS loansand the proposed rule that the Education Department published in August.
Under the Department’s final rule, PLUS borrowers will fail the credit check for the loan 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. (See page 83 of this document for the final regulation.) The Department has decided to peg the $2,085 de minimis amount to the Consumer Price Index for All Urban Consumers (CPI-U). Borrowers who receive the loan on appeal or through use of an endorser will now have to undergo loan counseling. In addition, the Department plans to release, where appropriate, data on PLUS loan defaults including institutional cohort default rates. The regulations are expected to be implemented by March of this year.
New America provided several comments on the proposed rule back in September. Our major concern about these new regulations is that they continue to enable low- and moderate-income parents to borrow well beyond their ability to repay without many consumer protections in place. And while the Department has said in its final rule that, “we disagree that these regulations will put low-income borrowers at risk,” these small regulatory fixes 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. As we wrote in our comments, “this definition, in other words, enables the Department to be a predatory lender.”
How do we solve this? It can only be done through legislation. As we’ve recommended at New America, we could redirect the poorly-targeted higher education tax benefits like the American Opportunity Tax Credit and the Tuition and Fees Deduction and vastly increase the Pell Grant—a much better source of aid for low-income families. Meanwhile, if the federal government is going to continue to be in the business of lending student loans to parents, there needs to be more consumer protections on the loans and more accountability for colleges and universities that have high PLUS default rates. When Congress finally gets around to reauthorizing the Higher Education Act here are two statutory changes that should be considered:
- Add an “ability to repay” measure to the credit check for PLUS loans. Looking at someone’s adverse credit history is divorced from whether or not someone has the ability to repay the 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. In instances where the amount a parent can borrow is less than the difference between the dependent and independent loan limits, the dependent student should be able to borrow as if he was an independent student instead of the parent taking out a loan. This would mimic current practice to allow a student to access the independent student loan limit if his parent is denied the PLUS loan.
- Hold institutions accountable to PLUS default rates. Unlike other federal student loans, college are not held accountable for Parent PLUS loan defaults and the loans don’t have a cap making it easy for colleges to fill financial aid award letters with PLUS loans up to the full cost of attendance. Just like with current institutional CDRs, institutions should face sanction if its Parent PLUS CDR is over 30 percent, including eventual loss of eligibility to offer PLUS loans.
A statutory fix to the PLUS loan program is likely years away. In the meantime, as the final regulations go into place, the Department must do a better job reaching out to parents and helping them understand the terms and conditions of their loans, including the ability to repay their loan as a percent of their income if they consolidate into a Federal Direct Consolidation Loan. Better counseling won’t solve all the issues with the PLUS loan program. But it’s a start until we can ensure PLUS loans are a safe product for families and we can improve access to better aid options like grants for low-income families.