The U.S. Department of Education is approving big PLUS loans for some parents who cannot afford to repay them, several college financial aid officers and financially strapped parents say.
"We were dumbfounded, just dumbfounded," when the government approved a $5,000 PLUS loan application this fall, says Tammy Turner, of Ruskin, Fla. Her husband is disabled, and can only work part time. She also works part time because they have a son with several health challenges, including diabetes and Tourette syndrome.
The Turners applied for the federal parent loan because they didn't have enough savings to pay the bills at their daughter's college, Southeastern University in Lakeland, Fla. The college's financial aid officers had told them that students whose parents get rejected for PLUS loans can get up to $5,000 in extra Stafford student loans. Many families prefer to take out larger student loans because parent PLUS loans charge a higher fixed annual percentage rate of up to 8.3 percent. Student Stafford loans charge a maximum of 6.9 percent (including fees), and offer many more affordable repayment and forgiveness options.
The Turners, who say they have a poor credit history and do not have any extra income at the end of each month, nevertheless got approved for the federal parent loan. They are at a loss because unless they can persuade Southeastern to override the government and reject their PLUS, they won't have any other way to pay the college bills. "We can't afford to pay it back," Turner says. "It's kind of ridiculous. They are setting families up for hardship."
Of course, PLUS loans are voluntary. The vast majority of college parents don't apply for the loans, which can cover a child's full net cost of attendance. And those who do, like the Turners, are free to turn them down.
But college financial aid officers say they are worried that many financially strapped and unsophisticated parents may be taking PLUS loans to help their children out now, not realizing that how much trouble awaits them if they start missing payments.
While taking on additional debt is a bad idea for anyone facing financial difficulties, federal parent loans are especially onerous. Parents who take out PLUS loans may not realize that most bankruptcy judges won't discharge PLUS loans. Federal parent loans can only be forgiven in extreme cases -- such as death, permanent disability, or permanent financial collapse.
Melet Leafgreen, assistant director of loan programs for Texas Christian University , recently heard from a parent who was approved for a PLUS loan even though he is living on disability benefits. "He called and said, 'This is crazy! I am in a wheelchair and may never work again.'" Leafgreen was able to override the approval and make sure he was rejected so that his child could get the larger student loan. She worries that many financially strapped parents who get approved just take the loans and don't call their colleges. "They are giving loans to people who have no business getting federally funded loans," says Leafgreen.
The Department of Education says it is simply awarding PLUS loans according to the rules set by Congress: Federal law "provides no authority for the Department to deny an applicant a PLUS loan based on their perceived ability to repay the loan," a department spokesman explained via E-mail. Instead, parents can borrow as long as they don't have what the law calls "adverse credit." That low standard only cuts off parents with serious credit problems such as a bankruptcy, lien or foreclosure in the last five years, or a bill currently more than 90 days overdue.
The department spokesman, who insisted on anonymity, noted however, that college aid officials can override any federal student or parent loan approval if the parent can show he or she really can't afford the loan. "The reason for the action [must be] documented and provided in written form to the student or parent," the spokesman said.
Because no one knows how many parents are taking college loans they can't afford, there is debate over how big -- or small -- the problem might be.
Nancy Lynn Hoover, director of financial aid at Denison University , in Granville, Ohio, and chair of a committee of college aid officials that specializes in the federal loan program, thinks very few parents are getting in over their heads. She said many college aid officers may have noticed a difference in approval standards this year because on July 1, the federal government took over handling of all federal college loan applications. Before that, private banks, many of which had tougher lending standards for PLUS loans, were paid by the government to process most federal college loan applications. "I personally have mentored over 100 schools' [switch to the federal loan management system], Hoover says. "If it were a situation of much magnitude, I believe I would hear it."
But even a few loans to parents who can't afford them at each of the more than 4,000 colleges in the U.S. would mean financial crises for thousands of families. And other research indicates the number of questionable approvals could be significant. Last year, Mark Kantrowitz, publisher of Finaid.org, wrote a paper estimating that private lenders rejected 42 percent of all parent PLUS applicants in the 2007-2008 fiscal year. The federal government, however, rejected only 21 percent of applicants that year, he found. Of course, the private banks could have made mistakes as well. Kantrowitz reported anecdotal evidence that the private banks sometimes rejected applicants for comparatively minor transgressions, such as any 90-day delinquency in the last five years.
Last fiscal year, about 737,000 parent PLUS loans were approved, out of an estimated 1.1 million applications. If a similar number apply this coming year, and the government continues its current policy, it will likely approve 825,000 parent PLUS loans. If even, say, 5 percent of those loans go to parents who can't afford them, more than 40,000 families will face financial crises. Since the average parent PLUS loan totals $12,300, that would mean the government had made risky parent loans of more than $500 million.
Sarah Bauder, assistant vice president of enrollment services and financial aid at the University of Maryland-College Park , said the PLUS approval rate for parents of her students has jumped from about 80 percent to 97 percent since the switch to the federal direct lending program. She says she knows at least a few of the parents who have been approved are jobless or teetering on the edge of bankruptcy. "Look at the housing market scenario. Five to seven years down the road, we're going to be in the same situation for parent loans," Bauder warns.
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