I think Parent Plus loans should consider parents’ income for qualification. We’ve seen VERY low income parents signing Plus Loans with the idea that their kids will pay the loans back once they’re employed.
I can only guess that a very low income parent thinks that his/her newly graduated student earning - say - $50k per year can live on $20k and put $30k per year towards loan repayment…forgetting that a young single person earning $50k per year is not going to net anywhere close to that, and may have to live in an area with pricey rents.
We’ve seen low income NYU-bound kids who have parents taking out Plus loans for near-full cost of attendance! That is crazy! If the parents can’t qualify for the Plus loans using reasonable loan qualification standards, then the loans should not be awarded.
I just have to comment on the CC president’s comments: You are an idiot. I won’t even dignify the comments with a reason for my opinion.
As for the info in the OP’s post: This has been a conversation for many years. One grant-one loan has been a topic of conversation in Congress for ages. I think it is getting closer to reality, and I am frankly worried about the PLUS loan restrictions being discussed. I work at an MFA school, and the talk of capping Grad PLUS based on perceived “worth” of a particular degree is chilling for schools like mine - and for our students.
This (broadly) is one strategy that might help to bring down the cost of college. Right now schools have no economic motivation to lower the price because of the no-ceiling loans available to parents. Putting limits on those loans will necessarily lower demand, which in turn – if schools keep supply (enrollment) constant – will force them to decrease price to meet that lower demand.
Also helping to decrease brick-and-mortar college demand will (would) include things like increased CC and trade school utilization and increased use of online degree programs.
It will (would…) be difficult for some before price adjusts to the lower demand, but in the long run this is potentially how we’re going to lower the price of college, and then keep any increases roughly in-step with inflation.
@IN4655
I doubt this will hurt med school loans. Med school loans are rather low risk. and there are other options…Discover, etc. Parents aren’t needed for these loans.
I think this is more directed at undergrad loans where failure to pay back is an issue.
Plus loans are fine as long as the parents can show that they qualify income-wise!
Oh, if only it were as simple as that, @prezbucky. The truth is, it is extremely expensive to run college programs. People seem to think college is expensive because college administrators see a money-spigot due to unlimited access to student loans. Reality is, the costs of running colleges (salaries, benefits, physical plant, compliance) are extremely expensive. Tuition does not pay for the costs - endowments and other revenue streams are needed to plug the gaps. If only those who think they know the way it is could actually see how it really is.
Yes, and that’s partly why we have the best schools (overall) in the world. But i wonder how large the faculty and staff (especially faculty) pay increases have been over the last decade. Does any other country’s schools come close to paying their instructors what we pay ours? I wonder if there’s wiggle room there.
People work for pay, not warm fuzzies. If they don’t get at least some raise once in awhile, they will move on. In order to have a good school, the pay has to be competitive. Educators are no different than workers in any other industry - they are not volunteering their time. I am not a faculty member, but I am a higher ed administrator. The level of expertise required of me and the responsibility I have are far greater than many of my friends who work in industry - and they make more a LOT more than I make. I like working in higher ed - I love my students. I want to keep their tuition as low as possible. But workers and buildings and electricity and benefits and lawyers and everything else do cost money. I really, really wish it was different, though.
@mom2collegekids – as I posted above, I took PLUS loans because I couldn’t qualify by my income to take out a HELOC, even though I was sitting on enough equity in my home to significantly drive up my private-school expected contribution – which also took into account the income of a non-contributing former spouse. I know I wouldn’t have qualified based on home-borrowing standards because I refinanced my home several times over the years, and each time I was told that I barely qualified for the loan even though each refi was bringing my monthly mortgage costs down.
But I also took a look at my overall assets and income, figured out what a monthly payment would be, and limited myself to borrowing no more than $40K over the years. I borrowed far less than that, probably around $25K total.
I would agree on some sort of caps for undergrad borrowing, and it might help if parent borrowers were not allowed to defer making at least interest-only payments in the beginning. (I did not defer payments, and that meant that I was always very much aware of what my debt service would be).
I also agree with others that the free ability of PLUS loans does drive up costs, especially the way that colleges like NYU push parents and students to take such loans. (And who knows what the for-profit colleges are doing). (In addition to presenting parent PLUS loans as part of the financial aid package for undergrads, NYU specifically encourages its MPA students to finance their entire education with grad PLUS loans on the rationale that their degree prefers them for public service, so they will all qualify for IBR and only have to make 10 years of payment and have the balance waived. Probably similar for a number of other degrees as well)
But there needs to be a balance struck-- especially for parents whose non-liquid assets might be driving up expectations as to a parental contributions. I think caps on the amounts allowed for PLUS loans makes more sense because it is something that can be applied across the board.
It would be intriguing to see what would happen if the PLUS were capped at the level of the FAFSA EFC - I would have had problems then, with my partial-PELL-eligible daughter, but I always was somewhat dubious of the way the college worked to maximize her PELL eligibility and at the same time was happy to use the Profile to tell us that our EFC was $10-$15K higher than the FAFSA EFC. But they’d have to rethink the way they determined “full need” if parent the federal PLUS system wasn’t there to fund that gap.
I am sorry but I feel like the government needs to protect people from themselves. Americans are too eager and willing to take money when offered. It happened with housing and it is happening with Parent Plus loans. Americans just cannot handle blank checks. Too many people get into trouble. They need to put some limits on them. Maybe equal the Stafford loans. So a parent could take out $5,500 freshman year. I know it is patronizing but how many stories do you read about parents getting totally swamped in debt only to say “it was my child’s dream school and felt it was worth it”. Yeah but now they cannot pay and want us Taxpayers to pick up the default. That is the problem. Everything seems fine when someone else is paying for it. JMHO.
With all due respect. I disagree 1000%. Many folks do just fine borrowing a lot of money. We only hear the stories of the ones who are unsuccessful, but I have several folks working for me with over $75,000 in college debt in a very expensive area (Boston). They simply live with roommates drive used cars (or don’t drive at all and take public transit) and find ways to manage just fine. They do not regret borrowing for the private school education that they got. They are not newsworthy so you don’t read stories about them.
We should do a better job educating people about the risks, but we are all better off letting some people those calculated risks by investing in themselves.
@MassDaD68 – the default rate for Parent PLUS loans for students at public colleges or private non-profit colleges is well under 4%. (The big problem is with the private for-profit outfits – with a 13%+ default rate - so the obvious reform is to either eliminate the ability of those schools to offer federally supported loans, or to impose greater limits on borrowing in that context.) PLUS loans do require a credit check, and 42% of loan apps (combined parent & grad numbers) were because of failure to pass the credit check. So for the most part, those loans are being taken by parents who have a history of responsibly handling debt. My data source: http://www.nasfaa.org/news-item/1359/ED_Releases_Cohort_Default_Rate_Data_For_PLUS_Loans
When I was applying for my first loan I was factoring in elements such as the fact that I was just finishing paying off a car loan, so I could use the same dollar amount that had paid for the car to service X dollars in college loans. I agree with a cap on parent loans, but the $5500 for students is way too low in today’s college environment. Many parents have very good reasons for borrowing, and the PLUS loans have some built in protections against events such as disability.
I do think they should eliminate the ability for parents to defer all payments on PLUS loans until after the student’s graduation – parents should at least be required to make interest-only payments, if not the regular amortized payment. That way the reality of the loan would be recognized by parents fairly early on – and if they couldn’t keep up with year #1 payments, their payment status and resultant diminished credit rating might stand in the way of borrowing for subsequent years.
I used PLUS loans as a current financing system – that is, I reasoned that I could easily manage $500 in monthly payments ($6000 a year). So that was $6000 available for college, or roughly $40,000 of total borrowing power. So I did the math to figure out how much to pay up front in year #1, and how much to finance via loans-- remembering that if I borrowed $10K each year, my first year loan payments would only be about $60 a month for the first semester’s borrowing. I actually only borrowed $9K in year 1, and then -0- in year 2 because it turned out that I hadn’t factored in other cost savings when son was no longer living at home. But since I was making those payments all along I wasn’t likely to get into trouble. I did budget carefully and did not borrow more than was necessary to make it all work out, and I don’t think my monthly payments ever went above around $350 because I ended up not needing as much as I had thought.
I think it’s a good program. Only a small fraction of parents get into serious trouble with it – so reforms should be targeted at those parents, not punishing the vast majority who make sensible decisions and use the loans to bridge the gap between what they can afford to pay out of pocket. I actually looked at what was sitting in my IRA when my son started college-- that was another source of college funds (no penalty for early withdrawal of IRA money to pay for college) – but I think borrowing via PLUS was a more responsible decision, as my IRA has grown since then and I keep getting older.
Perhaps the PLUS amount should be keyed to some multiple of the FAFSA EFC, as the FAFSA EFC number provides a quick way of factoring in income and assets. For example, I would have had all the borrowing power I needed if the rule was that I could borrow up to double my EFC - I’m guessing a rule that keyed maximum annual PLUS borrowing to 2.5x the parental portion of EFC would probably meet the needs of most middle class families while preventing those at the lower end of the economic spectrum from digging in too deep
I’m all for a hands-off approach to markets where possible – including the limiting of loans, which would be an artificial manipulation. If the default rate is under 4%, that’s pretty good, and it shows that the credit checks are working. I do think that having good online college and trade/CC/tech school options are important for those who either can’t afford college (initially) or can’t get in.
I do think there is probably a fairly large faculty salary cushion here in the US (vs. other countries…), so if schools had to cut costs, they could shave or freeze faculty salaries without much risk of losing them to similar jobs elsewhere – the risk would be from the private sector luring faculty away, I suppose. Maybe there are other areas where cost can be cut or frozen, to stem these annual increases in price that seem to be outpacing inflation by double. If only 4% are defaulting on loans and we call that acceptable, maybe we just need to figure out how to keep tuition increases to roughly 2% or less per annum.
The massive increase in tuition (and borrowing) is a relatively new thing, so even if parents and students can afford payments for the most part in the near term, we still don’t know the long term effects on retirement savings, healthcare accounts etc. I think cost of college needs to be addressed. The rate of increase has outpaced inflation and just about everything else.
From the engineering tenured and tenure track faculty I know, most seem to spend about 1/3 of their time teaching undergrads; 1/3 teaching grad level classes, supervising grad students, and conducting research; and 1/3 on consulting/professional societies. While tuition doesn’t pay for the cost of running a university, it’s far from obvious how much of that cost goes to undergrad education.
Not really. Before the big crash in 2008, the default rates on mortgages were under 1%. No one ever thought they would be at even 2%, and the banks set their lending qualifications with that number. Bank credit cards had maybe a 3-4% default rate, but rates on credit cards were at 20% (lower rate cards didn’t have nearly that high a rate). High risk lenders like Household or American, with unsecured loan default rates in some states were 8-9%, but the lending was at 33-36%.
4% is heading toward high risk, yet people want the rate to stay at 8%. If the government was a private business, 4% default on unsecured loans at 8% wouldn’t make business sense, especially with no qualifications, no income check.
The PLUS loan default rate was roughly equivalent to overall credit card default rates reported in the same time frame.
Mortgages are secured and the crisis post-crash was because borrowers lost their property, leading to a ripple effect. The trading in derivatives & credit swaps also magnified the impact.
PLUS loans can go delinquent, but in general cannot be wiped out in bankruptcy – which means that a significant fraction of amounts in arrears can ultimately be collected.
But the Plus loans do not report as in default as quickly as a credit card. If you do not pay a Plus loan, first it goes into delinquent status and then into default (might be 9 months later). If a credit card lender has 4% of its cards in default, it has 96% of its customers paying at a higher rate - often 15-29%. It sets its rates to cover the defaults.
Yes, they were secured, the applications were scored (or were supposed to be) and the default rate climbed higher than anyone expected. I wasn’t talking about the post crisis crash or the ripples, I was talking only about the actual default rate. Historically, the default rate on a secure loan was below 1%. No one ever imagined the default rate would go to 5%. This was secured lending, so if someone defaulted, the bank was still covered. , right up until the security wasn’t covering the loan. Student loans are unsecured, and everyone expects the default rate to go above 4%. What is the government going to foreclose to get back to breaking even?
Just recently the Dept of Ed said that they are way under budget for the amount of loans that are being forgiven, that are on 20+ years of deferment and will never pay off. It is not as if a 4% default rate means 96% of loans are paying as scheduled. The rates for Plus loans are set by the treasury, and they do not cover defaults. The rates aren’t set to cover defaults or they’d go up as the default rate goes up.
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as I posted above, I took PLUS loans because I couldn’t qualify by my income to take out a HELOC, even though I was sitting on enough equity in my home to significantly drive up my private-school expected contribution – which also took into account the income of a non-contributing former spouse. I know I wouldn’t have qualified based on home-borrowing standards because I refinanced my home several times over the years, and each time I was told that I barely qualified for the loan even though each refi was bringing my monthly mortgage costs down.
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Well, then maybe some sort of “meeting in the middle.” Maybe qualifying shouldn’t be as stringent as a private bank, but not as ridiculously easy as it is now. The idea that some low income family earning less than $20k per year can take out Plus loans for up to COA every year is just insane.
I agree with your idea that payments should not be deferred, because that just encourages these agreements that the student is going to pay back the loan, not the parent. and, maybe there can be some sort of “meeting in the middle” here as well. If the plus loan is $5k or less per year, then payments could be deferred, but anything more than that needs immediate payments. That would discourage low income parents who can’t make any payments at all from taking out full COA loans.
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am sorry but I feel like the government needs to protect people from themselves.
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As someone who is “right of center,” I cringe at that statement, but I also “get it” when it comes to supporting this sort of thing. I belong to a couple of extremely large FB college parent groups and it saddens me to see so many modest income parents (especially single moms) who, out of guilt, are signed up for massive parent plus loans because they can’t say “no” to their kids. “My kid worked so hard in college. They deserve this.” Omg. I cringe at the idea of gov’ protecting people from themselves, but really some protections are needed because really once these folks eventually default it’s really the REST OF US that need to be protected from the impact of all these defaulted loans.
I have said many times that I would like to see the student fed loan structure change. I’d like to see an option that CC-bound students can choose where they borrow nothing for their Frosh and Soph years, and they’re “rewarded” by being allowed to borrow $15k per year for their Jr and Sr years. This would tremendously help many young people who face big gaps in funding when they’re ready to transfer to finish their education. This option would also reduce the large number of CC bound students who drop out at some point, but are burdened with loans that they took out just to have extra money.