PLUS loans are experiencing yet another scandal. The ultimate source of this particular one is the way the federal government calculates student loan default rates for college accountability. Colleges are punished if their student loan default rates go too high. But the government’s default formula only includes Stafford loans. PLUS (both Parent and Grad) loans and Perkins loans are ignored in the calculation. This is a gaping loophole, and some colleges appear to have been exploiting it. As Rachel Fishman of New America explains:
“… there’s evidence that some colleges and universities might be steering students away from other, better federal student loans and toward Parent PLUS to avoid penalties associated with high student loan default rates.”
“It suggests that institutions are skirting accountability meant to protect students, families, and taxpayers.”
Skirting accountability is bad enough, but it gets worse. The interest rate on Stafford loans is 6.8 percent, while the interest rate on PLUS loans is 7.9 percent. So by encouraging PLUS over Stafford loans, colleges are undeniably inflicting harm to the families of students.
Colleges are deliberately steering families toward more expensive loans simply for those colleges’ own benefit. It is hard to imagine for-profit companies getting away with this predatory behavior.
What should be done?
First, close the loophole through which Parent PLUS, Grad PLUS, and Perkins loans are not counted in default-rate calculations. There is no reason this loophole should exist.
And then there are two other related policy changes:
Through the Free Application for Federal Student Aid (FAFSA), the government already determines how much it thinks parents can afford to pay for college—the parents’ portion of Expected Family Contribution (EFC). Yet when it comes to determining how much parents can borrow through Parent PLUS, the government ignores its own calculation and lets colleges determine how much parents can borrow. A better method would determine the amount of Parent PLUS loans for each family based on the parents’ portion of EFC.
In addition, the desire to lower defaults among students resulted in allowing payment deferments, forbearance, and now income-based repayment. But because these programs are successful in lowering student loan defaults, they also have the unintended consequence of undermining efforts to hold colleges accountable for high default rates by “artificially” lowering colleges’ default rates. This can be remedied by keeping the definition of “default” focused on students and instead holding colleges accountable for “repayment rates” (the percent of loans or dollars borrowed by all students that are being fully repaid). This dual approach—default rates for students and repayment rates for colleges—would establish a better college accountability lever for the federal government while maintaining the borrower protections for students that reduce the frequency of, and damage done by, outright default.
Photo Credit: Michael Morgenstern for The Chronicle