The federal government has just opened the door for more parents to borrow for college.
While those who are financially strapped might applaud, plenty of critics worry that loosening the loan requirements will lead to financial hardship for parents who take on too much debt.
Parents who have blemishes on their credit history are now more likely to qualify for a federal PLUS Loan. The government will now look at parents' credit problems, such as bankruptcies and foreclosures, only during the past two years rather than the previous five years. Uncle Sam will also overlook any delinquent debt that doesn't exceed $2,085, and that amount will be adjusted for inflation in future years.
The U.S. Education Department estimates that the relaxed standards, which will take effect next year, will permit another 370,000 loan applicants to pass the credit-history check for this parental loan.
The PLUS is an expensive loan that's also a moneymaker for the federal government. The interest rate is currently 7.21 percent, with a 4.29 percent fee tied to the amount of the loan. The interest rate is linked to the 10-year U.S. Treasury, so it rate changes each year.
The PLUS Loan was originally launched in 1980 to primarily help middle- and upper-middle-class families send their children to expensive private colleges. The modern PLUS Loan allows parents to cover the cost of any school after student grants and student federal loans are subtracted from the cost of attendance. In some cases, parents can borrow tens of thousands for each year their child is in college.
The danger that these loans pose is that parents can take on a huge amount of debt even if they have little or no chance of paying it back. That's because the loan approval process doesn't consider whether parents have the income or assets to cover the loan payments.
However, the government has never published the default rates for parent borrowers from individual schools. Nor have schools been held accountable for encouraging parents to borrow through PLUS Loan and who ultimately default. In contrast, schools can loose federal funding if the default rate for student federal loans at their institutions is too high.
So, as part of the changes, the government will begin disclosing PLUS default rates for parent borrowers at individual colleges.
Washington has been under tremendous pressure to loosen the requirement since the U.S. Education Department toughened the PLUS Loan borrowing requirements in 2011. Historically black colleges have been among the most vociferous critics of the PLUS Loan tightening because many of their families rely on these loans to pay for college.
But Rachel Fishman, a policy analyst at the New America Foundation, who wrote a scathing report earlier this year entitled, The Parent Trap: Parent PLUS Loans and Intergenerational Borrowing, is critical of the relaxed loan standards. The federal government, she wrote, is serving as a "predatory lender" by giving loans to people who won't be able to repay them.