Reshaping Parent PLUS Loans: Recommendations for Reforming the Parent PLUS Program

Research Report

Reshaping Parent PLUS Loans: Recommendations for Reforming the Parent PLUS Program

Abstract

The Parent PLUS loan program, introduced during the 1980 reauthorization of the Higher Education Act, was designed to help high-asset families who needed liquidity to cover their expected family contribution (EFC). Since then, however, policymakers have pushed the program past its original mission, leaving some low-income parents with loans they cannot repay. Some policymakers have suggested easing repayment requirements, but we find that such policies could threaten the program’s long-term viability, and we argue that loans to parents with limited resources are a poor substitute for financial aid.

The growth of Parent PLUS

As loans to undergraduate students have declined, Parent PLUS loans have risen from 14 percent of total federal lending for undergraduates in 2012–13 to 23 percent in 2017–18. In 2017–18, the parents of 779,000 undergraduates borrowed an average of $16,452 in Parent PLUS loans.

Parent PLUS borrowers are primarily from high-income families. In 2015–16, about 40 percent of Parent PLUS dollars went to parents from the highest income quartile.

High-income families also tend to take out larger Parent PLUS loans. The median first-year PLUS loan was $7,000 for households with incomes below $20,000 but was $17,850 for households with incomes above $100,000. 

The current system allows parents to borrow more than they can repay

Though the Parent PLUS loan program was originally designed to assist parents who might otherwise not be able to pay their EFC up front, 62 percent of Parent PLUS borrowers in 2015–16 borrowed more than their EFC.

Because parents can borrow more than their EFC, and because the lending process for Parent PLUS doesn’t consider a parent’s ability to repay, the current system can leave low-income parents with large loans they cannot pay off. 

Though default rates are lower for parent loans than for student loans, disparities in repayment success remain. The default rate among parents of black students who began college in 2003–04 was 20 percent, compared with 5 percent for parents of white students. In addition, the default rate among parents of students at for-profit institutions was 16 percent, compared with 6 percent for private nonprofit and 5 percent for public institutions.

Income-driven repayment will create more problems than it solves

Some policymakers have suggested expanding income-driven repayment (IDR) plans for Parent PLUS loans to ease the burden on parents who borrowed more than they can repay. IDR makes sense for students, whose investments in higher education are likely to lead to higher earnings over time. But for parents, many of whom have already reached their earnings peak, the same logic doesn’t apply.

In this report, we estimate what would happen if IDR plans were extended to Parent PLUS borrowers, considering IDR plans requiring 20, 15, and 10 percent of discretionary income. In the most generous case, we estimate that 22 percent of parent borrowers might enroll in IDR, lowering the amount they would end up repaying.

Congress should modify the program to ensure sustainability and protect borrowers

A revised Parent PLUS program should do the following:

  • Limit the amount parents can borrow through the Parent PLUS program to the EFC
  • Allow dependent students with $0 EFCs to borrow up to the independent student federal loan limit
  • Exclude new Parent PLUS borrowers from IDR
  • Measure Parent PLUS default rates to discourage institutions from pushing low-income parents to apply for these loans

Policymakers should also help current Parent PLUS borrowers who are struggling to repay by allowing for easier loan discharge in bankruptcy, forgiving loans to borrowers with long-term participation in social safety net programs, and continuing to allow those who borrowed under the old system to access income-contingent repayment through consolidation.

This report was updated on April 30, 2019. On page 11, the data source listed in the text was updated to match the source line of figure 7.

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