Here's how it works:
- The loans go directly to parents. Their children must be dependents.
- To qualify, parents must pass a credit check. Any outstanding debts within the prior 3 months or delinquent accounts over the last 5 years immediately disqualify parents.
- Parent PLUS interest rates are 6.41% compared to federal student loans which are 3.86%. That's a 66% premium.
- Loan payments begin as soon as the funds are disbursed to parents. There are a limited number of repayment options.
Though more expensive than student loans, the plan has been popular with parents perhaps because it doesn't saddle their children with college debt. At its peak in 2011, $11B had been disbursed to ~1M borrowers. However, the default rate on the loans has also risen. In 2010, 4.1% of parents had defaulted on their PLUS loans, compared to 1.8% in 2006.
A research fellow at the American Enterprise Institute, Awilda Rodriguez, has unearthed some data about the parents who are participating in the program:
- Parents believe they are assisting their children to earn a degree. But, many of those loans are paying tuition at institutions with poor or middling graduation rates, not institutions with high graduation rates.
- Families across the income spectrum are borrowing funds, although the amount borrowed varies. In general, more affluent, college-educated, two-parent households take out larger loans.
- On average, PLUS loans represent 33% to 50%+ of the tuition aid students receive, regardless of income, marital status, or education.
So, it's safe to say, it's the upper middle and upper class who are taking advantage of Parents PLUS, not the poor. But, here's Rodriguez's most important finding: Most PLUS loans are funneled to schools where tuition costs have risen faster than inflation. Why so? Parents PLUS induces administrators to increase tuition because parents can always take out additional PLUS loans. If that steady stream of tuition revenue wasn't available, those administrators--especially at institutions with those poor and middling graduation rates--would have to think very hard and at least twice about increasing tuition. Why? They'd cause enrollment declines and lower cash flow.
Like the federal student loan programs, Parents PLUS adds more hot air to the college tuition bubble, driving up the cost of attending college. The collapse will surely come--after all, enrollment declines at institutions across the nation are increasing--as students and parents begin to figure out that the investment isn't worth the reward.
Let the discussion begin...
To read Awilda Rodriguez's study, click on the following link:
"Access to what and for whom? A closer look at federal Parent PLUS loans."