Defaults Rise in Parent PLUS Loans

Parents who've taken out federal student loans to help pay for their children's college education are increasingly finding themselves in serious financial trouble. Default rates on Parent PLUS loans have tripled in the last few years, according to federal data released this month.

Some 5.1 percent of loans that originated in the 2010 fiscal year were in default three years later, according to U.S. Department of Education data released last week. Default rates were highest, at 13.3 percent, for Parent PLUS loans at for-profit colleges.

The default rate could grow still if borrowers who chose to defer payments until their child graduates from college - so a student who enrolled in the fall of 2011 may not finish until May 2015, for example - aren't able to repay the debt. That won't be known just yet.

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The Parent PLUS program allows parents to borrow funds that are capped by the cost of attendance, minus grants or other loans. As the cost of college has skyrocketed, the PLUS program has become increasingly important for families that max out on federal student loans and can't pay the rest of tuition out of pocket.

There's roughly $62 billion in outstanding debt from Parent PLUS loans, with borrowers owing an average $20,300, according to the Education Department. It released the data as a government committee considers changes to the eligibility criteria for those loans.

Parent PLUS loans were considered easy money because the criteria to qualify were particularly lenient. In 2011, the government tightened the standards for qualifying, which led to families' being rejected and resulted in an outcry by some parents and university officials.

The availability of easy money and sky-high tuition can put individual families in a bind. Rachel Fishman, a policy analyst at the New America Foundation, told InsideHigherEd.com that institutions used PLUS loans to disguise their prices.

"We absolutely should be concerned about defaults in the PLUS loan program," she said.

The student loan debt problem is even more widespread when you consider all student loans, not just Parent PLUS loans. According to the Federal Reserve Bank of New York, people 60 and older owed a record $43 billion in all student loan debt last year. Some of it was the collective bill from midlife workers returning to school. Some helped their kids or grandchildren pay for their education.

For people collecting Social Security who are unable to repay that debt, their retirement benefit could be docked by as much as 15 percent, or $190 from a monthly payment of $1,234.

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Meanwhile, a study by Sallie Mae, a provider of student loans, said yesterday that parents of young children were saving more these days for college. About half of some 2,000 parents with kids under age 18 say they're saving for college and socked away an annual average of $3,398.

Nearly 10 percent of parents say they're planning to tap their retirement funds to help them pay for college, even though financial planners warn against that, the study found.

 

Photo: Wendell and Carolyn/iStock

 

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