Most parents will do just about anything for their children, especially when it comes to education. Predictably, at a time when college costs are exploding and students are staggering under more than $1 trillion in debt, one opportunistic lender is making huge profits on loans to their doting moms and dads.

Less predictably, that lender is the United States government.

The fast-growing federal program known as Parent PLUS now serves 3.2 million borrowers, who have racked up $65 billion in debt helping their kids go to school. The loans have much in common with the regular student loans that have created a national debt crisis and a 2016 campaign issue, but PLUS has much higher interest rates and fees, and far fewer opportunities for loan forgiveness or reductions.

In fact, the PLUS program, which includes similar loans to graduate students, is the most profitable of the 120 or so federal lending programs. That sounds like a good thing, until you remember the government’s profit comes from its own citizens, often citizens of modest means.

Parent PLUS was created in 1980 to provide small loans to help reasonably well-off families finance the American Dream of an undergraduate education. But in an era of skyrocketing education costs, it has grown to look a lot like publicly funded predatory lending, providing almost any borrowers with almost unlimited cash to attend any school with almost no regard to their ability to repay. Thirteen percent of undergraduates now rely on Parent PLUS, and many of their parents are falling into debt traps.

“You feel so guilty that you haven’t done enough for your kid, and they make it so easy to get the loans,” said Elizabeth Hill, a 57-year-old property appraiser from the Boston suburbs with more than $30,000 in PLUS debt. “Then they’ve got you by the cojones. It’s like ‘The Sopranos,’ except it’s the government.”

For all the controversy swirling around student loans, lending money directly to students at least has a “human capital” rationale, since recipients pursue degrees that can boost their earning power and help them fulfill their obligations. But when parents borrow, they’re often taking on new debts just as their earning power is starting to dwindle. They’re not building human capital. They’re just getting closer to retirement, mortgaging their futures on behalf of their children. And if they default, the government can garnish their wages and even their Social Security checks — less brutal than “The Sopranos,” but just as effective.

According to the White House budget office, the expected recovery rate for defaulted Parent PLUS loans is a remarkable 106 percent, a testament to Uncle Sam’s unique power as a collection agency. Overall, the program is expected to return $1.23 on every dollar it lends this year, thanks to its relatively high interest rates and minimal opportunities for debt relief, as well as the government’s relentlessness in tracking down overdue education loans. The only federal loans that generate slightly better returns are the similar PLUS loans to graduate students, which have much lower default rates.

POLITICO has been investigating the government’s bizarre $3.3 trillion loan portfolio, which is riddled with tensions between the interests of borrowers and taxpayers. Some credit programs are almost comically risky for the government, most memorably a rural broadband effort with an official default rate of a seemingly impossible 116 percent. Parent PLUS loans are the flip side of the coin, generating reliable profits for taxpayers but serious risks for moderate-income borrowers.

Just about everyone I interviewed thought Congress should consider major reforms to Parent PLUS when it takes up a higher education bill this fall, but no one was too optimistic that reforms would pass, largely because of those profits.

“Parent PLUS is classic predatory lending. It’s not a safe product for many of these families, and the debts will hound them forever,” said Rachel Fishman, an education policy analyst at the nonpartisan New America think tank. “But it’s a cash cow for the government, so it’s going to be extremely difficult to reform.”

Parent PLUS is not a trap for everyone. The latest data suggest that only 5 percent of borrowers are defaulting within their first three years of repayment, although that figure is rising rapidly. The White House budget tables suggest the expected default rate over the course of the loans is well above 10 percent, which is still well below the rate for regular student loans. There’s a wealth of evidence that college degrees boost lifetime earnings, and defenders of Parent PLUS say it’s an important tool for increasing college graduation rates. PLUS loans have also become a key revenue source for many schools, particularly historically black colleges and for-profits that tend to serve lower-income families.

But that just illustrates the increasingly tortured economic paradoxes at the heart of modern higher education, where schools have no incentive to provide affordable prices as long as they can count on federal dollars for making education affordable. Ultimately, Parent PLUS sluices more cash into the college-industrial complex, helping educators jack up their tuitions while pressuring parents to make up the difference with debt, while doing nothing to ensure they’re getting a real return on their investment. It enhances accessibility, but not really affordability, simply giving parents a way to punt the skyrocketing costs into the future. Even some advocates who fiercely defended Parent PLUS during a high-profile controversy in 2011, when the Obama administration briefly reined in loans to parents with sketchy credit histories, told me the program is deeply troubled and inherently flawed.

When I spoke to White House education adviser Roberto Rodriguez about this conundrum, he emphasized that President Barack Obama has crusaded to make America the world’s leader in access to higher education, expanding Pell grants to low-income students and “income-based repayment” for burdensome student loans, while proposing to make community college free. Parent PLUS, he said, is another important tool to help young people pursue a better life. But he also said he's concerned that too many struggling parents are getting in too deep. When I asked him if the Education Department was running a predatory lending program, he didn’t say no.

“That’s the heart of the matter,” Rodriguez said. “You want to expand access and choice, but you also want to make sure families can afford these loans.”

HILL AND HER husband are solidly middle class and proudly thrifty; she drives a 15-year-old minivan and shops at TJ Maxx. She and her husband put away money for their son Aaron’s education, and though they burned through some savings when Hill lost her job early in the Great Recession, they figured they’d be fine when Aaron chose the University of Massachusetts at Amherst over several private colleges. He also won some academic grants and maxed out on federal student loans. But even a public school like UMass cost $25,000 a year. Hill just couldn’t make the numbers work.

Until, suddenly, she could. Hill discovered she was eligible for Parent PLUS, which would cover whatever Aaron’s grants and loans didn’t. At the time, Hill felt like she had won something, even though the loans are entitlements for anyone without a recent history of “adverse credit.” She feels differently now that Aaron has moved back home with his degree and taken a job at a local liquor store — and her husband may have to postpone his plans for retirement to make ends meet.

“You’re at your wits’ end, you want to help your kid, and this fairy princess appears on your computer and says: ‘Want some money?’” Hill recalled. “You’re like: Bingo! It’s more than you can afford, but dammit, education is important, right? Then four years later, you can’t believe how much you owe.”

When Congress created Parent PLUS 35 years ago, the loans were capped at $3,000 per year, until that was lifted in 1992 so families could borrow as much as they wanted toward the cost of attendance at any public or private school. But the rules do not allow colleges to ask about their income or their ability to pay. And the borrowers don’t have to start making payments until the student leaves school, although the interest accumulates the whole time.

Congress set the maximum interest rate at 9 percent in 1980, which seemed generous at a time when mortgage rates were skyrocketing toward 18 percent, but Parent PLUS is no longer a particularly attractive deal for families with other options. The current rates are about 7 percent plus a 4 percent origination fee, a lot lower than credit card debt or payday loans, but a lot higher than subsidized student loans.

“I figured the rate wasn’t terrible, and the money was so easy to get,” said Debbie Hounanian, a 56-year-old office manager in the Los Angeles suburbs who racked up $54,000 in Parent PLUS debt. “I had no idea what I was getting into.”

As student debt has drawn protests and political attention, the government's lending to their parents has quietly grown into a dangerous burden. | AP Photo | As student debt has drawn protests and political attention, the government's lending to their parents has quietly grown into a dangerous burden. | AP Photo | AP Photo

Today, the average Parent PLUS loan is about $13,000, and many parents pile up much larger debts now that some schools cost more than $50,000 a year. The loans are almost impossible to discharge in bankruptcy, just like student loans, but they’re ineligible for most of the income-based payment relief available for student loans. Consumer advocates compare them to subprime mortgages before the bust, encouraging families to bite off more debt than they can chew — except that Parent PLUS also has a government imprimatur.

Toby Merrill, who runs a Harvard-affiliated legal services clinic that focuses on predatory lending, recalls one ready-to-retire borrower who contacted her after running up $150,000 in PLUS debt on three children.

“The question was: What are my options?” Merrill said. “It was sad, because the answer was: You don’t really have options.”

AS STATE AID for higher education has plunged while the cost of college has escalated, PLUS loans have become an increasingly routine method of filling the gap, with about 700,000 new loans every year. Some schools actually include PLUS in their financial aid offers, telling parents they’ve qualified to take out, say, $20,000 in PLUS loans, a rather disingenuous way of saying the actual offer will leave them $20,000 short of the school's official cost of attendance. Colleges with tight budgets have little incentive to tell students they can’t afford to enroll, and strong incentives to encourage students to load up on PLUS loans that pass directly into their coffers. The president of Albany State University in Georgia even admitted at a public hearing that cash-strapped colleges have been steering students from student loans into more onerous and expensive Parent PLUS loans, because they’re required to report default rates for student loans but not for Parent PLUS.

The 2011 controversy over Parent PLUS, when the Obama administration temporarily tightened the program’s lax vetting process, illuminated the extent to which colleges and families have become dependent on the cash. It erupted after the Education Department’s financial aid office finally recognized a longstanding absurdity: the “adverse credit” reviews for PLUS applicants were flagging some delinquent debts, but not debts that were so delinquent they had been sent to collection agencies or written off. As a result, many applicants were getting loans with worse credit than rejected applicants.

“It made no sense,” said Ben Miller, who was a senior policy adviser at the department during the PLUS flap and is now director of post-secondary education at the left-leaning Center for American Progress. “But fixing the problem had a much bigger impact than anyone realized it would.”

Quietly, the department started counting more bad debts in its credit reviews — and PLUS rejection rates soared. Students who couldn’t renew their loans began dropping out of school. And schools that relied heavily on PLUS revenue began hemorrhaging cash. At historically black colleges and universities, which had been particularly hard-hit by the recession, the number of PLUS recipients dropped 45 percent over the next two years, depriving them of an estimated $150 million. Three struggling black colleges—in Virginia, Georgia, and North Carolina — ended up shutting their doors, and larger schools like Morehouse endured mass layoffs.

“Our schools were screaming bloody murder,” said Thurgood Marshall College Fund President Johnny C. Taylor Jr., a leading advocate for historically black colleges and universities. “Forget salt — this was pouring acid in our wounds.”

For-profit schools absorbed an even bigger hit, a 54 percent decline in PLUS enrollment. But for obvious political reasons, the black schools (with fierce support from the Congressional Black Caucus) led the fight to get the first African-American president to reverse or at least delay the changes. Taylor and other advocates had several tense meetings with Education Secretary Arne Duncan, repeatedly asking why a two-decade-old snafu had to be corrected immediately, why the tougher reviews couldn’t be limited to new PLUS applicants, why a secretary who had said expanding access to college would be his “North Star” was restricting access to college. Duncan emphasized that the changes weren’t directed at black schools, but Taylor shot back that they were having a disproportionate effect on black schools.

“The secretary kept saying: My lawyers are telling us to do this; we’re doing our best to work it out,” Taylor said. “Give me a break! We were trying to revive a community with double the unemployment rate of the majority community.”

Eventually, Duncan publicly apologized to black college leaders for the abruptness of the changes, acknowledging that “communication internally and externally was poor.” He promised to consider appeals from all rejected PLUS applicants, and launched a process to write new PLUS credit rules.

“It was an operational screw-up of epic proportions,” said Justin Draeger, president of the National Association of Student Financial Aid Administrators. “But it was a pretty good reminder that Parent PLUS helps a lot of people pay for college.”

In 2014, the department announced the new PLUS rules, essentially reversing its efforts to tighten credit checks. Bad debts are no longer grounds for rejection if they’re less than $2,085 (versus $500 in the old rule) or less than two years old (versus five years). The department didn’t even require loan counseling for all PLUS borrowers, just those who managed to get loans despite adverse credit.

“It’s a shame. Most parents would be better off taking a second mortgage,” said Natalia Abrams, director of the advocacy group Student Debt Crisis. “Instead, they’re getting trapped. They assume that if the government is offering these loans, they must be safe.”

To my surprise, Taylor told me he agrees. Taylor was probably the most outspoken critic of the administration’s short-lived efforts to rein in Parent PLUS, and he still believes it was unfair to change the rules so suddenly after a brutal downturn. But he asked me not to describe him as a Parent PLUS defender. He said the program is so exploitative that he once investigated a class-action lawsuit, but found that debt-ravaged parents were too ashamed to go public.

“It’s a horrible program, totally out of control,” he said. “We’ve got to figure out a way to make college affordable, but Parent PLUS is definitely not the answer.”

So what’s the answer?

OBAMA'S NEW CONSUMER Financial Protection Bureau has raised alarms about predatory lending by bankers and mortgage brokers. At a recent event, Richard Hunt, the president of the Consumer Bankers Association, posed a question to CFPB Director Richard Cordray: “Why aren’t you doing anything about Parent PLUS?” Cordray replied that he didn’t have jurisdiction over the federal government, but Hunt believes that if one of his members offered a similar loan product with similarly negligible underwriting standards, the bureau would be all over it.

“The silence has been deafening,” Hunt said. “It’s sinister to see the government throw money at people with no clue if they can pay it back.”

Hunt would like to see the private sector — that is, his members — take over the business. And some private lenders are starting to compete with Parent PLUS — one Rhode Island bank is offering a similar product with a much lower interest rate of 3 percent and no origination fees for the most creditworthy borrowers. But while PLUS loans don’t have the same protections as federal student loans, they do include some options most private banks won’t match, like the ability to defer payments for years.

What PLUS lacks is flexibility. Parents who qualify can borrow whatever they need for their kids to attend whatever school they want, while parents who get rejected can’t borrow a dime. In another hearing, an administrator of a North Carolina college shared a sad vignette about a homeless woman who was denied a PLUS loan, implicitly suggesting the government should have extended her virtually unlimited credit. In fact, that’s exactly what would have happened if her credit had been clean. Nobody would have been allowed to try to gauge whether her income or assets gave her any hope of repayment. Parent PLUS suffers from a paradox that also afflicts government loans for agriculture, shipbuilding and just about everything else: It’s highly risky for borrowers who need it most desperately, while the borrowers who could most easily handle the debt could probably get by without it.

Many critics argue that Parent PLUS should be abolished, and that the government should expand Pell grants and raise caps on student loans instead. But even those who want to continue the program — including Rodriguez in the White House and Republican staffers on Capitol Hill — seem to agree there are relatively obvious ways to strengthen it. The most evident would be real underwriting standards to evaluate the ability to pay of potential borrowers. Another would be strict loan caps. Or a combination of those reforms could link the creditworthiness of borrowers to the size of the loans they’re eligible to receive, the kind of calculation real banks make. Even Draeger, who represents aid administrators at 3,000 colleges and universities, said the system needs structural changes to protect vulnerable families.

“We definitely support new underwriting standards. Parents are getting in too deep, and it’s affecting their ability to retire and enjoy life,” he said. “Right now, schools just have to follow the rules, and from a consumer protection standpoint, the rules are dangerous.”

The major obstacle to reform, beyond Washington’s general dysfunction and polarization, is the immense profitability of Parent PLUS. These days, the government borrows money at almost no cost, so lending at 7 percent plus fees can add up: Parent PLUS could reduce the deficit by $3 billion this year. That means any effort to scale it back and restrict it to creditworthy borrowers would cost the government a lot of money. Politicians generally don’t like paying more money to provide fewer benefits, especially when a well-organized political coalition has defended those benefits in the past.

“That’s the perversity of a loan program like this,” one senior GOP aide said. “It makes it that much harder to fix.”

In other words, Washington has become as dependent on Parent PLUS loans as the schools that flack them and the parents who receive them. The status quo has tremendous power, because Congress likes profitable programs, schools like reliable revenue, and parents like to help their kids.

Hill and her husband have another son getting ready to start Ithaca College, just as they’re starting to pay back Aaron’s loan, but they're determined to help out again. They haven't figured out how they're going to do that yet, because there's no way they're going back to the Parent PLUS well again.

“Fool me once, right?” Hill said. “I don’t want to put my kid in a bind, but these loans are ridiculous. The guilt system only goes so far.”



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