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Because no one knows how many parents are taking college loans they can't afford, there is debate over how big—or small—the problem might be.
Nancy Lynn Hoover, director of financial aid at Denison University, in Granville, Ohio, and chair of a committee of college aid officials that specializes in the federal loan program, thinks very few parents are getting in over their heads. She said many college aid officers may have noticed a difference in approval standards this year because on July 1, the federal government took over handling of all federal college loan applications. Before that, private banks, many of which had tougher lending standards for PLUS loans, were paid by the government to process most federal college loan applications. "I personally have mentored over 100 schools' [switch to the federal loan management system], Hoover says. "If it were a situation of much magnitude, I believe I would hear it."
But even a few loans to parents who can't afford them at each of the more than 4,000 colleges in the U.S. would mean financial crises for thousands of families. And other research indicates the number of questionable approvals could be significant. Last year, Mark Kantrowitz, publisher of Finaid.org, wrote a paper estimating that private lenders rejected 42 percent of all parent PLUS applicants in the 2007-2008 fiscal year. The federal government, however, rejected only 21 percent of applicants that year, he found. Of course, the private banks could have made mistakes as well. Kantrowitz reported anecdotal evidence that the private banks sometimes rejected applicants for comparatively minor transgressions, such as any 90-day delinquency in the last five years.
Last fiscal year, about 737,000 parent PLUS loans were approved, out of an estimated 1.1 million applications. If a similar number apply this coming year, and the government continues its current policy, it will likely approve 825,000 parent PLUS loans. If even, say, 5 percent of those loans go to parents who can't afford them, more than 40,000 families will face financial crises. Since the average parent PLUS loan totals $12,300, that would mean the government had made risky parent loans of more than $500 million.
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Sarah Bauder, assistant vice president of enrollment services and financial aid at the University of Maryland—College Park, said the PLUS approval rate for parents of her students has jumped from about 80 percent to 97 percent since the switch to the federal direct lending program. She says she knows at least a few of the parents who have been approved are jobless or teetering on the edge of bankruptcy. "Look at the housing market scenario. Five to seven years down the road, we're going to be in the same situation for parent loans," Bauder warns.
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