“The Obama administration is moving to ease access to student loans for parents with damaged credit, a policy reversal that could saddle poor families with piles of debt but also boost college enrollment…
…Consumer groups warn the new standards could bury low-income families under debt for years, repeating a pattern that played out as banks loosened mortgage standards in the run-up to the housing crash. Student debt can’t be discharged in bankruptcy.”, Josh Mitchell, “Parents Poised to Gain Easier Access to College Loans”, Wall Street Journal
“With my tongue in my cheek once again….I guess only “wise” government politicians and bureaucrats know when credit to American consumers is Just Right???”, Mike Perry, former Chairman and CEO, IndyMac Bank
Parents Poised to Gain Easier Access to College Loans
Amid Enrollment Pinch, Tighter Standards Put on Borrowing Program in 2011 in Line to Be Loosened
By Josh Mitchell
The Obama administration is moving to ease access to student loans for parents with damaged credit, a policy reversal that could saddle poor families with piles of debt but also boost college enrollment.
Under a plan likely to take effect next year, the Education Department would check the past two years of a borrower’s credit, instead of the current standard of five, for blemishes such as delinquencies or debts in collection. Also, any delinquent debts below $2,085 would be overlooked; currently, delinquencies of any amount are grounds for rejected applications.
Supporters of the plan say the loan program, known as Parent Plus, is increasingly needed to help poor families who lack savings afford the college of their choice. Without these loans, undergraduates are restricted to Stafford loans—capped at $57,500 for life—or private-sector loans, which generally go only to borrowers with the best credit. Parent Plus standards were tightened in 2011.
Consumer groups warn the new standards could bury low-income families under debt for years, repeating a pattern that played out as banks loosened mortgage standards in the run-up to the housing crash. Student debt can’t be discharged in bankruptcy.
Sue Hart of Flushing, Mich., is an example of the risks involved in such loose standards. The 54-year-old was living off of disability income in 2008 when she and her husband, who is retired, took out Parent Plus loans to cover college expenses for their daughter. Months later they filed for bankruptcy protection because, Ms. Hart said, they couldn’t keep up with an auto loan and mortgage debt.
Still, the couple continued to borrow student loans over the next two years and now owe the government $36,640. “I always told her we would help,” Ms. Hart says of her daughter. “We can’t pay for it, but I said we’d help, and she knew that she would kind of take it over once she graduated.”
But their daughter, who went on to earn a master’s degree and owes $100,000 in student loans herself, can’t make the payments. She is earning $12 an hour doing catering instead of working in her field of social policy.
The debate reflects the administration’s tough balancing act as it seeks to boost college enrollment, particularly among low-income students, without promoting overborrowing and excessive tuitions. Student debt has doubled since 2007 to $1.1 trillion, according to the Federal Reserve Bank of New York, becoming the second-highest form of consumer credit after mortgages.
Supporters say default rates among parents are relatively low and that debt amounts are typically reasonable. Some three million Parent Plus borrowers now owe $62 billion, or an average of $20,667.
The administration estimates the changes will allow an additional 370,000 borrowers a year to receive loans.
The administration’s plan follows heavy lobbying from historically black colleges, some of which saw enrollment decline by a fifth after the government tightened lending standards on parents in 2011. Hundreds of thousands of parents had loans rejected after the change. Historically black colleges say they were particularly affected because they disproportionately serve disadvantaged students.
“In our system, almost everybody except rich people are dependent upon federal financial aid to educate their children,” said David Swinton, president of Benedict College, a historically black school in Columbia, S.C.
After the Parent Plus program was tightened, enrollment at historically black schools like Benedict College fell off. Here, the Benedict College band performs in Columbia, S.C., last month. ZUMAPRESS.com
After the 2011 tightening of lending standards, the share of applicants at Benedict approved for Parent Plus loans fell to 24% from 43%. School revenue declined by more than $50 million, or 20%, in the first year, Mr. Swinton said.
A report from the United Negro College Fund, which represents historically black schools, said the number of students at such schools with Parent Plus loans fell by 17,000, or 45%, in 2012-13 from the prior year. Those colleges lost $155 million in funds from the program, the group said.
Education Department spokeswoman Denise Horn said the new rules would ensure more families “can afford a higher education…without opening the door to excessive borrowing.” Imposing more-stringent standards, such as considering a borrower’s income, would require a change in law by Congress, she said.
But there are already signs of strain. The share of the three million borrowers defaulting within three years, while relatively low, has doubled since 2009 to just over 4%. That figure is artificially low because the government has allowed parents to postpone payments while their children are in school.
Credit counselors say they have seen a rise in borrowers who took out large sums despite being on limited incomes.
“This debt will remain a huge problem for the rest of their lives,” said Toby Merrill, head of the Project on Predatory Student Lending at Harvard University’s Legal Services Center.
For Melanie Daye, a 51-year-old real-estate agent from Boston, the reward was worth the risk. Ms. Daye, who says she earned a bachelor’s degree but had to work throughout school, took out $130,000 in loans to help her twin sons attend college. Both earned degrees and now have jobs—one as a signal man for a commuter railroad and the other as a county corrections officer.
While she hopes she will be able to pay off the debt, she said, “I wanted them to have a college experience because I never had it, like living on campus and all that.”