Forgiving PLUS Debt for Low-Income Parent Borrowers
Policymakers looking to ease the burden of student debt should not overlook parent loans. By forgiving federal loans made to parents who have virtually no chance of being able to repay, policymakers would relieve pressure on thousands of low-income households, with Black families receiving a relatively large share of the benefits because they disproportionately fall into the low-income range and attended underfunded institutions.
To limit the number of parents who will be in this situation in the future, policymakers could increase grant aid for low-income students and aid to their institutions to ensure parents who can’t afford loans don’t need them to access higher education for their children. Of parent borrowers with incomes below the federal poverty level when their child began college in 2011–12, more than three-quarters would not have needed to take out federal loans if the Pell grant program had provided an extra $6,000 per year for four years.
The Parent PLUS loan program allows parents of dependent students who meet minimal credit standards to borrow up to the full amount of the estimated student budget (less grant aid received) to pay for their children’s education. The program was designed to help parents with substantial resources pay their expected family contributions to their children’s education over time. The expansion of the program to include parents with little or no ability to pay back these loans emerged from a well-intentioned commitment to increasing access and choice for students from low-income families. But this strategy created unintended and unacceptable consequences.
The Parent PLUS problem
Analysis of detailed data on students who began college in 2011–12 from the Beginning Postsecondary Students Longitudinal Study (the most recent year for which detailed longitudinal data on students’ finances are available) reveals 19 percent of parent borrowers had incomes below the federal poverty level when their children first enrolled in college, and 38 percent had incomes below 200 percent of the poverty level. Among Black Parent PLUS borrowers, 34 percent had incomes below the poverty level, and 62 percent had incomes below 200 percent of the poverty level, as did 59 percent of Hispanic parents who took these loans.
Unlike loans on the private market, PLUS loans are available with a minimal credit check, regardless of ability to repay. Because of limited grant funding, PLUS loans are the key to financing college for many families, but the result is that some parents are on the hook for debt most lenders never would have granted in the first place. If these parents default on their loans, the federal government can garnish their wages or withhold their Social Security payments or tax refunds.
Forgiving the education debt of these parents who were seeking to open doors for their kids, to whom the federal government should have provided grants instead of loans, would repair some of the damage, preventing them from defaulting in their loans.
Options for forgiveness
Forgiveness could help boost families’ financial security by ending wage or Social Security garnishment (if the borrower is in default), relieving or reducing the burden of monthly payments, or potentially improving access to credit.
It would be inequitable to forgive all of the debt of parents whose incomes were below the federal poverty level when they borrowed—or below 200 percent of the poverty level or any other threshold—and forgive none of the debt of those just above the threshold. One option would be to forgive all of the debt of those whose incomes were below the poverty level when they completed the financial aid application and to reduce that share gradually for those with higher incomes up to 250 percent of the poverty level.
A similar approach, related to a proposal for borrowing limits in an earlier Urban Institute report, would be to lower borrower balances to the parents’ expected family contribution (EFC) at the time they borrowed, minus payments made on the debt. For example, a family with an EFC of $500 per year who borrowed for four years would have their debt reduced to $2,000. If the family already made $500 in payments, the debt should be reduced to $1,500. Such a strategy would eliminate all debt for parents who had a $0 EFC but leave some debt for those whose financial circumstances were stronger. Although slightly less transparent because the EFC calculation is a notorious black box, this strategy would peg forgiveness to financial circumstances, decreasing the amount forgiven gradually as EFC increases.
A third approach to implement some progressivity in forgiveness of Parent PLUS debt would be to limit the amount of forgiveness. Almost three quarters of the Parent PLUS borrowers with incomes below the federal poverty level—and about 80 percent of Black and Hispanic parents in this income range—when their children began college incurred less than $20,000 in total debt. Forgiving $20,000 in Parent PLUS debt for all of these families, $15,000 for those who had incomes between 100 percent and 150 percent of the poverty level, and a declining amount for those with higher incomes would erase the debt of almost three-quarters of the lowest-income borrowers and leave those who owe more with more manageable debt. Only 8 percent of Black parents below the poverty level borrowed more than $40,000, compared with 27 percent of white parents in this category.
Solutions for future borrowers
Forgiving the loans given to low-income parents will not solve the fundamental problem if Congress does not modify the program to prevent this type of lending in the future, limiting its loans to parents with reasonable prospects of being able to repay. But any changes to PLUS would need to be coupled with an expansion of grant aid to ensure families can still access a college education.
The intention of parent PLUS loans was to ensure all students had equal access to college, regardless of parents’ ability to pay. This has been particularly important for historically Black colleges and universities (HBCUs), which rely heavily on PLUS loans because of the large share of their students who are from lower-income families and the inadequacy of the institutional funding available to them. But larger grants and subsidies to institutions serving higher shares of low-income students—especially HBCUs—and to low-income students could accomplish the same goal without saddling parents with insurmountable debt burdens.
Significant increases in Pell grants for low-income students would prevent many families from having to rely on parent loans. The federal government now spends about $30 billion a year on this critical student aid program that provides a maximum of $6,345 to the lowest-income students in 2020–21. An extra $6,000 a year in Pell grants for four years would entirely replace the PLUS loans of about three-quarters of parents who borrowed with incomes below the poverty level (including 85 percent of low-income Black PLUS borrowers).
Students loans have opened doors for many students, whose college education has served them well. But some of the loans predictably create undue hardship, and the federal government should take responsibility for its part in this situation. Federal loans to low-income parents are no substitute for providing the grant aid students from low-income households need to make college a realistic possibility.
A graduate is silhouetted during the Boston College commencement at Alumni Stadium in Boston, Massachusetts, on May 21, 2018. (Photo by David L. Ryan / The Boston Globe via Getty Images)