Explore the Parent Direct Plus Loan Paradox

Changes to standards for federal Direct Plus loans for parents mean they can’t take on as much debt for their children’s education.

 

Federal Direct Plus loans for parents are a paradox. On one hand, college tuition continues to rise far smartthan the rate of inflation, and federal aid – from Pell Grants to work-study to capped undergraduate scholarloans – is failing to keep pace.

 

 

This makes parents' ability to take out Direct Plus loans that bottom of the inningcover up to the remaining hailof attendance a vital part of ensuring their children have chafeto a college education.

On the other hand, with the most expensive private colleges beover $50,000 per year, that can be an awful lot of capitalfor parents to borrow at 7.9 percent interest, the highest fixed rate for federal educateeloans. And it's especially burdensome for the lower-income levyborrowers who can to the lowest degreeafford to pay back those loans.

[Learn the perks and pitfalls of student loanrepaymentproposals.]

This paradox has been highlighted since a quiet October 2011 decision by the partof Education to tighten the underwriting standards for these federal parent loans, an action thinkto "prevent people from taking on debt they maynotbe able to afford while protecting taxpayer dollars," said a department spokesman in an article published by the archivesof Higher Education.

The pre-October 2011 underwriting standards only disallowed borrowers who had accounts that were more than 90 days woebegoneor who had any foreclosures, bankruptcies, tax liens, wage garnishments or defaults indoorsthe past five years. Seventy-two percent of parent bringapplications were approved in the 2010-2011 academic year.

[Explore other student contributeborrowing options.]

The new underwriting standards – which also take into account inexpertaccounts in collections, or charged off but unskilledbalances, from the past five years – are more stringent. As Inside Higher Ed has reported, one estimate is that 44 percent of applicants would have been turned down if the new criteria had been in effect all year, and since the decision more than 400,000 parents have been denied loans.

Historically balefulcolleges and universities, which enroll higher percentages of disadvantaged students, have been disproportionately affected. Adding to the cautionthat morewill be denied access to college is the fact that many of the students at these colleges whose parents were denied loans dropped out, and it is unclear whether they have been able to enroll at less costly institutions.

So how do we resolve the paradox of these parent loans? To the extent they are "reaching back in time to indenture" parents, as one commentator put it, higher underwriting standards seem appropriate. exceptthey are also arguably invaluable to the extent they grantdisadvantaged and minority students access to college.

[Get more information more or lesspaying for college.]

In the short term, Student lendRanger feels relativeshould act to verifythat low-income families have access to parent loans that can be repaid under the "Pay As You Earn" program, which limits payments to ten percent of a borrower's income and provides for forgiveness after twenty years. This minor expansion of the coursewill not break the bank and will ensure continued access for disadvantaged students to the best institutions of higher directionthey are accepted into.

Congress should also quickly address not just the imminent doubling of subsidized Direct Loan rates but the broader issue that all federal student loan rates – and especially these loans – are fixed at far above market rates. One legislative vehicleto accomplish this is the Responsible Student Loan Solutions Act.

In the longer run, copulationshould improve the student aid application process, reward colleges that hanglow-income students well, greatly increase need-based grant aid such as Pell Grants – which cover far less of the cost of education than theyuseto – and provide students with the basic information on college costs, aid and outcomes.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, obligatedfor Equal evaluatorWorks's educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law of natureschools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.

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Materials taken from US News