The Subprime Loans for College Hiding in Plain Sight

If you want your kids to go to college but you can’t afford the bills, the federal government has a deal for you that will blow your mind.

You can borrow the entire cost — minus any other aid your child receives — through something called a Parent PLUS loan. Moreover, your income — and thus your ability to repay the debt — doesn’t matter. As long as you don’t have one of a handful of black marks in your recent credit history, you can borrow six figures even if your take-home pay puts you below the federal poverty level.

This is totally bananas. But don’t take my word for it.

“The honest truth is that Congress created a subprime lending program unintentionally,” said Rachel Fishman of New America, the left-leaning think tank.

“I absolutely hate them,” said Beth Akers, of the American Enterprise Institute, the right-leaning think tank, referring to these loans.

“It’s gone completely off the rails,” said Justin Draeger, the president of the National Association of Student Financial Aid Administrators.

Most parents don’t pay for college using this loan. But about 3.6 million of them — with about $107 billion in outstanding debt — have. Within that group are a number of low-income Black families at schools that may not have given their kids enough help in the way of scholarships. Many of those families are struggling to repay the money that the federal government so freely offered up.

And, really, why wouldn’t moms and dads use a PLUS loan if it appears to be the least horrible option? For many people, parenting means keeping the American promise that children should do better than family members from previous generations. A college degree is a rocket booster that can help make that possible.

When Congress created parent PLUS loans in 1980, there were decent reasons for doing so. College costs had increased, and many middle-income families struggled to pay for tuition out of their income. At the time, interest rates were also very high.

The PLUS loan, which came with a lower-than-market interest rate, solved a worsening problem. It also made it easier for parents to pay a larger share of the bill and perhaps help their children borrow less.

At the time, you could borrow only $3,000 per year. In 1992, that cap went away, thanks, it seems, to a successful push by a higher education lobbying association, according to a report from the Urban Institute report in 2019.

What to Know About Student Loan Debt Relief

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Many will benefit. President Biden’s executive order means the federal student loan balances of millions of people could fall by as much as $20,000. Here are answers to some common questions about how it will work:

Who qualifies for loan cancellation? Individuals who are single and earn $125,000 or less will qualify for the $10,000 in debt cancellation. If you’re married and file your taxes jointly or are a head of household, you qualify if your income is $250,000 or below. If you received a Pell Grant and meet these income requirements, you could qualify for an extra $10,000 in debt cancellation.

What’s the first thing I need to do if I qualify? Check with your loan servicer to make sure that your postal address, your email address and your mobile phone number are listed accurately, so you can receive guidance. Follow those instructions. If you don’t know who your servicer is, consult the Department of Education’s “Who is my loan servicer?” web page for instructions.

How do I prove that I qualify? If you’re already enrolled in some kind of income-driven repayment plan and have submitted your most recent tax return to certify that income, you should not need to do anything else. Still, keep an eye out for guidance from your servicer. For everyone else, the Education Department is expected to set up an application process by the end of the year.

When will payments for the outstanding balance restart? President Biden extended a Trump-era pause on payments, which are now not due until at least January. You should receive a billing notice at least three weeks before your first payment is due, but you can contact your loan servicer before then for specifics on what you owe and when payment is due.

And, as college costs escalated, and schools included information about PLUS loans in a growing number of financial aid notifications that they sent to families, more of them borrowed. The government turns you down for the loan only if, at some point recently, you’ve discharged debt in bankruptcy, been subject to a tax lien, been 90 or more days late on a big bill or had similar problems.

A number of policy organizations have examined the impact of these loans as more data has become available. Let’s start by looking at the adjusted gross incomes of the parents who borrow using PLUS.

About one in three white borrowers earn more than $110,001, and about one in 10 earn less than $30,000 a year, according to Ms. Fishman, the acting director of the higher education program at New America and the author of a 2018 study on the matter.

Black families flip the script, with about one in 10 earning more than $110,001 and about one in three earning less than $30,000 a year. Unsurprisingly, given those income statistics, the federal government has, during the financial aid application process, told 42 percent of Black borrowers using Parent PLUS that they can’t afford to pay a single cent toward their children’s education, according to a Century Foundation report from this year.

But if there is not enough grant money available — from the government or the college — to subsidize their kids’ tuition in full, these parents and others like them borrow anyway. To put a finer point on it, the Department of Education says it doesn’t expect them to pay anything. And yet it tends to lend many of them nearly everything.

Now, to repayment — or not. Ten years after taking out a PLUS loan, borrowers whose children attended the colleges with the highest percentage of Black students owe an average of 96 percent of the original principal, according to the Century Foundation. At the schools with the highest levels of white enrollment, the figure sits at 47 percent.

That Urban Institute report from 2019, which proposed solutions to these problems, summed up the sorry state of affairs in this way: Parent PLUS loans are “a no-strings attached revenue source for colleges and universities, with the risk shared only by parents and the government.”

Trying to assign blame is tempting but pointless. Our elected representatives should have seen the unintended consequences coming, but they were trying to make paying for college easier. Some colleges may have over-promoted PLUS loans, but federal rules forbid them from preventing some families from using the PLUS loan as long as they meet the minimal eligibility requirements.

More on Student Loan Debt Relief

  • A Hard Sell: At the White House and aboard Air Force One, advocates of debt cancellation made a sustained push to win over President Biden. Here’s how he finally gave in.
  • No Longer a Taboo: Student debt used to be a topic steeped in shame and stigma. Now, talking about student loans has become normalized, for better or for worse.
  • Who Will Benefit?: The big winners from Mr. Biden’s student loan plan are not rich graduates of Harvard and Yale, as many critics claim. It’s the middle class — and disproportionately young and Black people.
  • Back to School?: Millions of people took on debt for college but left without graduating, making it harder to repay their loans. Will the Biden administration’s relief plan get them to try again?

Meanwhile, it’s hard to criticize devoted parents for trying to do right by their children. But it’s probably not prudent for many of them to borrow very much. With an interest rate that’s currently 7.54 percent, plus a whopping 4.228 percent origination fee, they are no bargain.

Unlike student loans — including PLUS loans for graduate students (about which more soon in another column) — Parent PLUS loans are not going to help them earn more. Repayment can last up to 25 years, which can push the bills well into what are supposed to be the retirement years. If you default, the federal government helps itself to a chunk of your Social Security check.

The obvious solution here is for states to subsidize their universities more generously and for the federal government to double (or more) Pell Grants for low-income students. If that happens, people won’t need to borrow as much. Politically, however, this is a nonstarter in many states — and, at least for now, at the federal level, too.

Loan cancellation is swell and all, and PLUS loans are indeed eligible for last month’s offer. But that doesn’t help parents of this year’s high school seniors.

More rigorous underwriting or the return of restrictions on PLUS loan amounts seems sensible at first glance. But are they equitable?

When the Education Department tried to turn the screws just a bit on credit standards about a decade ago, it cost historically Black colleges and universities about $150 million in lost revenue from tuition. Hurting institutions that exist, at least in part, to expand access also feels like a political nonstarter, not to mention amoral.

Alas, the most expedient fix may be to create more generous repayment terms — something based on parental income, perhaps with some kind of loan cancellation after a certain period of time. This adds complexity — not to mention possible incentive to borrow more (and for schools to charge more) — but at least it feels somewhat possible.

But all of these expensive, unworkable or unpleasant options raise an inconvenient question, one that Ms. Akers, the author of “Making College Pay,” posed to me this week: Why do we act as if college and graduate schools are infinitely valuable?

“If we reduce access with caps, we reduce access to college, and we always stop there and say that is terrible because education is wonderful,” she said.

“No one ever finishes the conversation and says that the people who were stopped were about to take on an investment that might not have a return and might put them in unaffordable debt,” Ms. Akers continued. “We seem not to be willing to have that conversation.”

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