The U.S. Department of Education is approving PLUS loans for some parents who cannot afford to repay them, several college financial aid officers and financially strapped parents say.
"We were dumbfounded, just dumbfounded," when the government approved a $2,453 PLUS loan application this fall, says Tammy Turner, of Ruskin, Fla. Her husband is disabled, and can only work part time. She also works part time because they have a son with several health challenges, including diabetes and Tourette syndrome.
[Learn how to get a PLUS loan.]
The Turners applied for the federal parent loan because they didn't have enough savings to pay the bills at their daughter's college, Southeastern University in Lakeland, Fla. The college's financial aid officers had told them that students whose parents get rejected for PLUS loans can get up to $5,000 in extra Stafford student loans. Many families prefer to take out larger student loans because parent PLUS loans charge a higher fixed annual percentage rate of up to 8.3 percent. Student Stafford loans charge a maximum of 6.9 percent (including fees), and offer many more affordable repayment and forgiveness options.
[Read about the advantages of federal student loans.]
The Turners, who say they have a poor credit history and do not have any extra income at the end of each month, nevertheless got approved for the federal parent loan. They are at a loss because unless they can persuade Southeastern to override the government and reject their PLUS, they won't have any other way to pay the college bills. "We can't afford to pay it back," Turner says. "It's kind of ridiculous. They are setting families up for hardship."
Of course, PLUS loans are voluntary. The vast majority of college parents don't apply for the loans, which can cover a child's full net cost of attendance. And those who do, like the Turners, are free to turn them down.
[Learn about charities and colleges that make interest-free student loans.]
But college financial aid officers say they are worried that many financially strapped and unsophisticated parents may be taking PLUS loans to help their children out now, not realizing that how much trouble awaits them if they start missing payments.
While taking on additional debt is a bad idea for anyone facing financial difficulties, federal parent loans are especially onerous. Parents who take out PLUS loans may not realize that most bankruptcy judges won't discharge PLUS loans. Federal parent loans can only be forgiven in extreme cases—such as death, permanent disability, or permanent financial collapse.
Melet Leafgreen, assistant director of loan programs for Texas Christian University, recently heard from a parent who was approved for a PLUS loan even though he is living on disability benefits. "He called and said, 'This is crazy! I am in a wheelchair and may never work again.'" Leafgreen was able to override the approval and make sure he was rejected so that his child could get the larger student loan. She worries that many financially strapped parents who get approved just take the loans and don't call their colleges. "They are giving loans to people who have no business getting federally funded loans," says Leafgreen.
The Department of Education says it is simply awarding PLUS loans according to the rules set by Congress: Federal law "provides no authority for the Department to deny an applicant a PLUS loan based on their perceived ability to repay the loan," a department spokesman explained via E-mail. Instead, parents can borrow as long as they don't have what the law calls "adverse credit." That low standard only cuts off parents with serious credit problems such as a bankruptcy, lien or foreclosure in the last five years, or a bill currently more than 90 days overdue.
The department spokesman, who insisted on anonymity, noted however, that college aid officials can override any federal student or parent loan approval if the parent can show he or she really can't afford the loan. "The reason for the action [must be] documented and provided in written form to the student or parent," the spokesman said.