Parent PLUS Loans Face Potential Reform Ranger student loan

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For more than 30 years, the Federal Parental Undergraduate Student Loan – or PLUS Loan – has helped parents bridge the gap between the financial assistance their children receive and the total cost of schooling. University. Once a relatively small program, PLUS has grown steadily over the years. college fees have increased and house prices have trended downward.

The use of home equity loans, once a top competitor of PLUS ready, fell as home prices fell in the last recession and many families found themselves topsy-turvy with their mortgages. The National Center for Education Statistics reports that 20 percent of parents took out parent PLUS loans for their child’s education in 2011-12, up from just 4 percent in 1989-90. About 3.3 million parents are repaying more than $ 75 billion in outstanding PLUS loans.

The need for parental loans shows no signs of abating. Many Gen Xers send their children to college while paying off their own student loans, which means less money for their children’s education. According to Associated press, about 6 million Gen X households still have student loan debt, and those with student loan debt and teenage children average barely $ 4,000 in college savings plans.

But will the Federal Parent Loan PLUS be there to help? For years, controversy has swirled over whether the PLUS loan is actually unfair to the borrower.

Parent PLUS loans are not need-based – borrowing is limited only to the full cost of tuition less any other loans and bursaries the student receives. Moreover, these loans are given as long as the parent does not have any adverse credit.

The borrower’s ability to pay or the debt-to-income ratio is not taken into account. As a result, some say PLUS loans are a lifeline for low- and middle-income families who have no other way to pay for college, while others argue that the loans have become a trap. in debt for too many people.

After looking at low-income families Free application for federal student aid, the federal government often determines that these individuals do not have the financial resources to contribute to the university, and the student will be eligible for the federal program Pell scholarship and other forms of financial aid. Yet the student’s parents can still borrow a Federal Parent Loan PLUS to the tune of thousands of dollars per year.

For the student, borrowing for college is often a wise investment because he or she will be better equipped after graduation to attain the income needed to pay off the debt. But the parents do not receive any monetary benefit of their child’s education and will receive a monthly payment of several hundred dollars. Plus, Parent PLUS Loans have higher interest rates and less generous repayment terms than Federal Student Loans.

Private market enthusiasts advocate ending the federal parent loan program and returning those loans to private lenders as a means of preventing risky borrowing and stopping out of control college fees. The idea is that colleges’ access to an unlimited supply of Federal PLUS funds allows them to increase tuition fees.

A few years ago, however, we saw a glimpse of what a world without PLUS Federal Loans could look like. Prior to 2010, private lenders who provided PLUS parent loans under the federal Family Education Loans program used a set of adverse credit standards that were more stringent than those the federal government uses for PLUS direct loans. .

In 2010, Congress ended the FFELP, and in 2011, the Obama administration aligned the credit criteria for direct PLUS loans with the then more stringent rules used by lenders. As a result, Kevin Carey, director of the New America Foundation’s education policy program, said, “The proportion of Parent PLUS applications denied due to bad credit has increased from 28% to 38% in a single year. . In total, some 400,000 requests were refused.

Many colleges have been affected by the drop in enrollment. And while some would say it’s 400,000 parents who weren’t caught in a predatory loan, it’s still 400,000 students who had to either turn to another form of funding or make the heartbreaking decision to give up. .

Private loans, with much stricter credit criteria, would never be an option for someone who is denied a PLUS loan without a co-signer. And yes, the student could certainly transfer to a cheaper college, but that undermines the original intention of federal student aid for higher education: to provide access and choice for graduate students.

For this reason, any decision by Congress or the White House to discontinue the federal PLUS program will meet with strong reluctance from the higher education community and many consumer advocates. However, some common sense reforms are much more likely in the short term, such as increasing advice and information for borrowing parents before they borrow, borrowing limits on PLUS loans and the annual publication of the PLUS parent default rate so that colleges can be held accountable for higher than average rates.

In the meantime, parents shouldn’t wait for lawmakers to develop a solution to the PLUS trap. Learn about the potential pitfalls and have a frank conversation with your kids now about what paying for that dream college will mean for your financial security later on.

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