Explore the Parent Direct PLUS Loan Paradox

Fewer federal direct loans get approved, but fewer parents end up with a high student loan burden.

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Changes to standards for federal Direct PLUS loans for parents mean they can’t take on as much debt for their children’s education.

Federal Direct PLUS loans for parents are a paradox. On one hand, college tuition continues to rise far faster than the rate of inflation, and federal aid – from Pell Grants to work-study to capped undergraduate student loans – is failing to keep pace.

This makes parents' ability to take out Direct PLUS loans that can cover up to the remaining cost of attendance a vital part of ensuring their children have access to a college education.

On the other hand, with the most expensive private colleges costing over $50,000 per year, that can be an awful lot of money for parents to borrow at 7.9 percent interest, the highest fixed rate for federal student loans. And it's especially burdensome for the lower-income parent borrowers who can least afford to pay back those loans.

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This paradox has been highlighted since a quiet October 2011 decision by the Department of Education to tighten the underwriting standards for these federal parent loans, an action intended to "prevent people from taking on debt they may not be able to afford while protecting taxpayer dollars," said a department spokesman in an article published by the Chronicle of Higher Education.

The pre-October 2011 underwriting standards only disallowed borrowers who had accounts that were more than 90 days delinquent or who had any foreclosures, bankruptcies, tax liens, wage garnishments or defaults within the past five years. Seventy-two percent of parent loan applications were approved in the 2010-2011 academic year.

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The new underwriting standards – which also take into account unpaid accounts in collections, or charged off but unpaid balances, from the past five years – are more stringent. As Inside Higher Ed has reported, one estimate is that 44 percent of applicants would have been turned down if the new criteria had been in effect all year, and since the decision more than 400,000 parents have been denied loans.

Historically black colleges and universities, which enroll higher percentages of disadvantaged students, have been disproportionately affected. Adding to the fear that many will be denied access to college is the fact that many of the students at these colleges whose parents were denied loans dropped out, and it is unclear whether they have been able to enroll at less costly institutions.

So how do we resolve the paradox of these parent loans? To the extent they are "reaching back in time to indenture" parents, as one commentator put it, higher underwriting standards seem appropriate. But they are also arguably invaluable to the extent they allow disadvantaged and minority students access to college.

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In the short term, Student Loan Ranger feels Congress should act to ensure that low-income families have access to parent loans that can be repaid under the "Pay As You Earn" program, which limits payments to ten percent of a borrower's income and provides for forgiveness after twenty years. This minor expansion of the program will not break the bank and will ensure continued access for disadvantaged students to the best institutions of higher education they are accepted into.

Congress should also quickly address not just the imminent doubling of subsidized Direct Loan rates but the broader issue that all federal student loan rates – and especially these loans – are fixed at far above market rates. One legislative vehicle to accomplish this is the Responsible Student Loan Solutions Act.

In the longer run, Congress should improve the student aid application process, reward colleges that serve low-income students well, greatly increase need-based grant aid such as Pell Grants – which cover far less of the cost of education than they used to – and provide students with the basic information on college costs, aid and outcomes.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.