Parent Plus loans look great but often end up a long-term burden on families

If you want your kids to go to college but you can't afford the bills, the federal government has a deal for you that will blow your mind.

You can borrow the entire cost — minus any other aid your child receives — through something called a Parent Plus loan. Moreover, your income — and thus your ability to repay the debt — doesn't matter.

This is totally bananas. But don't take my word for it.

"The honest truth is that Congress created a subprime lending program unintentionally," said Rachel Fishman of New America, the left-leaning think tank.

"I absolutely hate them," said Beth Akers of the American Enterprise Institute, the right-leaning think tank, referring to these loans.

Most parents don't pay for college using this loan. But about 3.6 million of them — with about $107 billion in outstanding debt — have. Within that group are a number of low-income Black families at schools that may not have given their kids enough help in the way of scholarships. Many of those families are struggling to repay the money that the federal government so freely offered up.

And, really, why wouldn't moms and dads use a Plus loan if it appears to be the least horrible option? For many people, parenting means keeping the American promise that children should do better than family members from previous generations. A college degree is a rocket booster that can help make that possible.

When Congress created Parent Plus loans in 1980, college costs had increased and interest rates were also very high. The Plus loan, which came with a lower-than-market interest rate, solved a worsening problem.

At the time, you could borrow only $3,000 per year. In 1992, that cap went away, thanks, it seems, to a successful push by a higher education lobbying association, according to a report from the Urban Institute report in 2019.

And, as college costs escalated, and schools included information about Plus loans in a growing number of financial aid notifications that they sent to families, more of them borrowed. The government turns you down for the loan only if, at some point recently, you've discharged debt in bankruptcy, been subject to a tax lien, been 90 or more days late on a big bill or had similar problems.

A number of policy organizations have examined the impact of these loans as more data have become available. Let's start by looking at the adjusted gross incomes of the parents who borrow using Plus.

About 1 in 3 white borrowers earn more than $110,001, and about 1 in 10 earn less than $30,000 a year, according to Fishman, the acting director of the higher education program at New America and the author of a 2018 study on the matter.

Black families flip the script, with about 1 in 10 earning more than $110,001 and about 1 in 3 earning less than $30,000 a year. Unsurprisingly, given those income statistics, the federal government has, during the financial aid application process, told 42% of Black borrowers using Parent Plus that they can't afford to pay a single cent toward their children's education, according to a Century Foundation report from this year.

But if there is not enough grant money available — from the government or the college — to subsidize their kids' tuition in full, these parents and others like them borrow anyway. To put a finer point on it, the Department of Education says it doesn't expect them to pay anything. And yet it tends to lend many of them nearly everything.

Now, to repayment — or not. Ten years after taking out a Plus loan, borrowers whose children attended the colleges with the highest percentage of Black students owe an average of 96% of the original principal, according to the Century Foundation. At the schools with the highest levels of white enrollment, the figure sits at 47%.

Repayment can last up to 25 years, which can push the bills well into what are supposed to be the retirement years. If you default, the federal government helps itself to a chunk of your Social Security check.

The obvious solution here is for states to subsidize their universities more generously and for the federal government to double (or more) Pell Grants for low-income students. If that happens, people won't need to borrow as much. Politically, however, this is a nonstarter in many states — and, at least for now, at the federal level, too.

Alas, the most expedient fix may be to create more generous repayment terms — something based on parental income, perhaps with some kind of loan cancellation after a certain period of time. This adds complexity — not to mention possible incentive to borrow more (and for schools to charge more) — but at least it feels somewhat possible.