The government wants to make it easier for parents with flawed credit to take out loans to pay for their children’s college education. Currently the U.S. Department of Education rejects Parent PLUS loan applicants with debt payment delinquencies of 90 days or more within the past five years. A proposal would cut the period under scrutiny to two years and allow for almost $2,100 in bad debt, according to a department document released in May. In either case, applicants can be rejected for other problems, including a default, bankruptcy, or foreclosure during the past five years.
Many parents have found it easier to qualify for PLUS loans than other loans because income and assets aren’t considered—only credit history counts. Consumer advocates say the proposed relaxation of rules will hurt borrowers and default rates will climb.
One potential problem is that parents are not required to start making payments until six months after their children graduate or leave college—the interest due during that period is added to the amount of the loan. The majority of parents borrowing with PLUS loans choose to defer payments, according to Chris Greene, a spokesman for the education department’s Office of Federal Student Aid. “Some of these loan characteristics—potential payment shocks and not verifying a borrower’s income—certainly strongly contributed to the mortgage crisis,” says Katie Buitrago, senior policy analyst at the Woodstock Institute, a nonprofit focused on fair-lending issues. “If you are deferring for four and a half years, that’s a lot of time for your financial situation to change.” Denise Horn, an education department spokeswoman, declined to comment on why the department wants to change the rules.
When Parent PLUS loans were first offered in the 1980s, repayment had to start immediately, while children were in school. Amid the financial crisis in 2008, Congress changed the law to allow deferrals. When the time comes to pay, many parents are startled by the higher balance, which includes accrued interest. “The idea that you wouldn’t have to pay anything for years might make it more likely you don’t pay attention to what the bottom line says,” notes Susan Dynarski, an economist at the University of Michigan. “I don’t understand the logic behind deferral on a PLUS loan.”