Cracking Down on PLUS Loans

WASHINGTON -- For the past year, parents hoping to borrow a federal loan on their college student’s behalf have found those loans are harder to get than they used to be.

A little-noticed Education Department change in October 2011 added new underwriting standards for the PLUS loan, the federal lending program for parents and graduate students. The changes made requirements more stringent and appear to have caused a spike in denials, including some to parents who had been able to take out the loans in previous years.

Based on last year’s trends, nearly half of would-be PLUS borrowers this academic year might be turned away, according to an analysis by Mark Kantrowitz, publisher of Finaid.org.

The denials have hit particularly hard at historically black colleges and universities, presidents of those colleges, as well as higher education associations, say. They have warned that some students might not return because they can’t get the loans to pay for college.

As national concern about student debt continues, the changing standards illustrate a tension inherent in the federal government’s student loan policies. Make getting the loans relatively easy, and risk defaults from borrowers who can’t repay -- a problem that now falls squarely on the shoulders of the Education Department, the nation’s sole federal student lender. Tighten eligibility requirements, and ignite concerns about college access in an era of climbing tuition.

In the past few years, parents have relied more on PLUS loans to pay the tuition bills, as college prices continued to rise and home equity lines of credit, once a popular way to finance a college education, dried up.

The amount students can borrow for their education is capped at between $5,500 and $7,500 per year in federal Stafford loans for most undergraduate borrowers. Parents, on the other hand, can borrow up to the full cost of attendance, more than $50,000 per year at the most expensive private colleges. PLUS loans don’t have the advantages of other federal student loans; unless consolidated with a student loan, they’re not eligible for repayment plans based on borrowers’ incomes. Colleges also aren’t on the hook if parents don’t repay.

Unlike other federal student loans, though, PLUS loans do require a credit check. Historically, the approval process for the loans has been relatively lax, especially in recent years.

According to Education Department standards, prospective borrowers can’t have any current accounts more than 90 days delinquent, or any foreclosures, bankruptcies, tax liens, wage garnishments or defaults within the past five years. But the department doesn’t look at prospective borrowers’ incomes or their current debt load, meaning that poor borrowers with little or no credit history can be approved.

When banks were the middlemen in the student-loan process -- making student loans guaranteed by the federal government -- they had the option to impose more stringent lending requirements, and some did, Kantrowitz said.

The result was a much higher denial rate for PLUS loans made through the guaranteed Federal Family Education Loan program than for PLUS loans made directly by the government. In a 2009 analysis based on Education Department data, Kantrowitz estimated that 42 percent of applicants for parent loans through the FFEL program were denied. For parents applying for direct loans, the denial rate was cut in half, to 21 percent.

When the Education Department switched entirely to direct lending, the high approval rates for direct loans continued. In 2010-11, the first year when all loans were direct loans, 72 percent of PLUS applicants were approved, and just 28 percent were denied, according to department data. At the same time, the loans continued to grow, from $7.6 billion in 2008 to $10.4 billion in 2011, according to Education Department disbursement data.

In October 2011, the department changed its underwriting standards. Charge-off accounts and accounts in collections within five years, if they had not been repaid, would now count against applicants for PLUS loans.

The change was made quietly -- the department didn’t convene a rule-making panel or issue a letter to colleges explaining it -- but the impact was dramatic, Kantrowitz said. Some creditors will put accounts in collections if a payment is only 30 days late. Parents who had previously been eligible for the loans found they had now been turned down.

Denials for PLUS loans jumped after the new requirement took effect, midway through the 2011-12 academic year. According to preliminary Education Department data, 38 percent of applicants for the loans were denied -- 10 percent more than in the previous year. If the new criteria had been in effect all year, Kantrowitz estimated, 44 percent of applicants would have been turned down.

The change was meant to bring Education Department requirements in line with industry standards, said Justin Hamilton, a department spokesman.

"The Obama administration is committed to ensuring that students have access to higher education and the skills they need to get a good job,” Hamilton said in a statement. “We’re also committed to high standards when it comes to managing taxpayer dollars and to ensuring that families aren’t taking on debt beyond what they can afford.”

Private colleges, and especially historically black colleges, worry that the changes could endanger college access. Both the National Association for Equal Opportunity in Higher Education and the United Negro College Fund have said they are concerned. Some black college leaders have asked the White House and the Education Department about the increased denial rates.

At Philander Smith College, a historically black college in Arkansas, denials jumped 75 percent from the 2011-12 academic year to this year, said David Page, the college’s vice president for enrollment management and director of financial aid. For the college, and the students, that’s had consequences, he said.

“That 75 percent equates to about 112 students that could have potentially borrowed, and that could have been the difference to allow them to enroll,” Page said, estimating that about 50 students didn’t return because they were denied PLUS loans.

During the 2010-11 academic year, 80 percent of PLUS loan applicants who were denied were able to pay for their college education in other ways, Hamilton said.

Students whose parents are turned down for PLUS loans can borrow more on their own -- up to an additional $5,000 per year in federal unsubsidized loans. They can also turn to private lenders -- although some lenders say their standards for private loans are more stringent than the government’s requirements for PLUS loans -- reapply with a co-signer for the parent loan, or appeal the denial to the Education Department.

Historically black colleges, the sector of higher education that appears to be most affected by the change, have much higher default rates on PLUS loans than higher education as a whole, according to Education Department data. Thirty percent of borrowers at those colleges who took out loans in 2001 have defaulted on them, compared to 11 percent across all sectors of higher education.

It’s not clear, though, whether the department’s new standards -- which only scrutinize a borrower’s credit history more closely without looking at other debts or income -- will help prevent those defaults, Kantrowitz said. “If you’ve got an account that was 90 days delinquent 5 years ago, or it was in collections 5 years ago, but is current now, that is not at all predictive of the borrower defaulting on the PLUS loan,” he said.

At Philander Smith, the cutback on credit, and the subsequent loss of students, has had a ripple effect across the entire campus, Page said. A small college, it has postponed some campus building projects due to the lost revenue and enrollment.

“It hurt us,” he said. “Everybody, across the board.”