Parents are borrowing more money than ever before to send their children to college—even as undergraduate borrowing has started to decline in recent years.
Nearly 800,000 parents borrowed an average of $16,452 during the 2017-18 academic year through the federal government's PLUS program. The total $12.8 billion represented a 42% increase over a decade, according to a report published Tuesday by the Urban Institute, a D.C.-based think tank. During that same period, the amount of undergraduate student loans increased by only 2%, to $43.3 billion.
As PLUS loans have grown in size and reach, the program has moved far away from its original aim to help wealthier families who didn't have the cash on hand to pay for college, the authors argue, and has left some lower-income families in financial trouble.
It's relatively easy to qualify for a PLUS loan. Parents only need to show they don’t have an adverse credit history, which includes having delinquent debt or a recent foreclosure or bankruptcy.
There's also a lax borrowing limit. Parents can take out up to the full cost of attendance, including tuition and living expenses, every year that their student is enrolled. Plus, there’s no vetting to determine whether a parent earns enough money to be able to repay the loans.
That program design makes it easy for parents to dig themselves in a deep hole, and financial experts have been warning that the loans are risky for several years.
Parents typically take out PLUS loans after their student has hit the federal borrowing limit, which falls between $5,500 and $7,500 annually, depending on the student’s year in college. That borrowing limit hasn't budged in the past decade, despite rising college prices.
And so while the parent loan program was created as a tool help higher-income families who had the means to pay for college but who needed the cash to pay upfront, it's now used by families across the income spectrum. Sixty-two percent of parents today borrow more than what the government says they can afford to contribute, as defined by their estimated family contribution from the federal financial aid formula.
Most of that group took out a loan that was only marginally higher than their estimated family contribution. But 11% of parents in the 2015-16 school year took out a loan for a single year of college bills that was at least $15,000 higher than what the financial aid formula determined they could afford.
There's little data about how well parents are repaying those loans, says Rachel Fishman, co-author of the report and deputy director for education research at New America, a separate think tank.
But the data that is available suggest the program is increasingly problematic. Default rates for parent PLUS borrowers have increased while repayment rates have slowed, according to research from economists with the Brookings Institute. And Fishman previously found parent loans exacerbate wealth gaps between white and black families.
That research, along with tales of families thrown into financial ruin in part due to over-borrowing PLUS loans, has led some policymakers to call for easing the repayment rules for the loans.
Yet the Urban Institute report authors suggest the best way to fix the program is to return it to its original mission. Parents should only be able to borrow an amount equal to what the government says they can afford in their estimated family contribution, the authors argue. Students from low-income families who don't have resources for a family contribution should have a higher federal student loan limit. And colleges should also be held responsible for the repayment rates on parent loans, so schools are discouraged from pushing the PLUS loans on parents who have little ability to repay.
For parents who already took out PLUS loans and are struggling, the government should ease the restrictions of discharging the debt in bankruptcy, the study's authors recommend. One change policymakers shouldn't pursue, though, is opening up all parent PLUS borrowers to more generous income-driven repayment plans. Those plans make sense for students who need a safety net guarantee if their earning potential doesn't grow with their degree. But for parents who are in their 50s and 60s, that logic doesn't hold up, says Kristin Blagg, co-author and research associate at the Urban Institute.
"There are ways to provide relief for low-income parent PLUS borrowers who are struggling now without compromising the program in the future," Blagg says.