NEW YORK (MainStreet) Federal student PLUS loans have become the target for criticism from both consumer advocates and their conservative critics. The quick study would be this: they're too easy to get and too difficult to get rid of.
But the Obama administration wants to loosen PLUS loan credit requirements, most likely to neutralize tighter underwriting standards unveiled in October 2011, when these loans became unavailable to borrowers who would have qualified in the past.
Unlike other Federal student loans which are made without underwriting, Federal PLUS loans and Federal Grad PLUS loans require a co-signerthe student's parent or guardian. The parent, not the student, is responsible for the payback.
Prospective PLUS loan borrowers currently undergo a cursory credit check, but a borrower's credit score or debt-to-income ratio are not taken into account. The new proposal would change and most likely end the practice of labeling loans over 90 days delinquent as an adverse credit which hurts a prospective borrower's chances of getting a loan. Stafford loans require no credit check or underwriting of any kind.
Also under the proposed rules, which appeared in The Federal Register on August 8, borrowers could have up to $2,085 in delinquent debt excluded from any credit check. Bankruptcies would still be held against would-be borrowers for up to five years.
"The Obama administration is committed to keeping college accessible and affordable and helping families make thoughtful and informed choices to fund a higher education in today's economy," Education Secretary Arne Duncan said in a statement. "These changes allow us to continue to be good stewards of taxpayer dollars and open the doors of college to ensure all students have the opportunity to walk through them."
The Department of Education (ED) is also looking at giving borrowers who were turned down a second chance by enabling them to show that extenuating circumstances were unreasonably preventing them from getting the cash.
Still, the essential PLUS loan features remain. The interest rate on Parent Plus and Grad Plus is 7.14% for the 2014-2014 academic year and the clock starts anywhere from the date of disbursement until 60 days later and runs until the payoff. Interest is 4.66% for Stafford loans.
Rates are tied to the 10-year T-Bill and are likely to rise through the current decade. Parents can still borrow up to the cost of attendance, which generally includes tuition, room and board, books and other fees, minus other loans, Pell grants, financial aid from the school and the expected family contribution. But there is no cumulative limit, giving borrowers who only want the best for their kids an opportunity to get in over their heads.
And the parents, not their kids, are still on the hook for these loans. People often get into trouble by taking out PLUS loans before maxing out what they can get from cheaper Stafford loans. Stories have surfaced in the industry of parents on fixed incomes paying their children's student loans as they enter retirement.
"I've seen a number of people in my practice who owe incredible amounts of money on PLUS loans, over $100,000," said Toby Merrill, director of the Project on Student Lending at the Legal Services Center of Harvard Law School. "These are people who make significantly less than $30,000 a year. Remember, there's no income-based repayment. Teacher loan forgiveness are not available in Parent PLUS loans."
Merrill also noted how PLUS loan balances could be compared to other Federal loans. "The annual loan limits for undergraduate Stafford is between $5,500 and $7,500, the aggregate limit is about $31,000 for the borrower's lifetime, regardless of the degree."
Merrill, who was on the Department of Education's Program and Improvement Rule Making Committee, which shut down this spring, said, "The goal shouldn't be to deny people with limited means access to college, but to make loans available that borrowers can afford to pay off. These loans have damaged a lot of families."
--Written by John Sandman for MainStreet