For the past two years, many colleges have scrambled to help students find the money they need to stay in school because the federal government tightened standards for lending to parents.
The flux was especially intense for historically black colleges and universities, including Howard and Morgan State universities, which serve a large share of students in financial need.
On Wednesday, the New America Foundation — a think tank with backing from the Lumina, Ford and Gates foundations, among others — said the government was right “in trying to prevent parents from borrowing loans they might not be able to afford.”
If anything, New America analyst Rachel Fishman argued, the Education Department’s reforms “were too modest.”
What the department did in October 2011 was expand slightly the list of red-flag criteria in a credit check that would result in denial of a parent loan application. To the previous list, which included bankruptcies and foreclosures, it added certain types of unpaid bills that had been written off or referred to collection agencies. That led to an increase in the loan-denial rate.
Federal officials, responding to an outcry over the denials, have taken steps to help families obtain loans through appeals, especially if they were denied because of minor blemishes on their credit record.
Many college presidents defend the parent loans as essential to helping students of modest means find the last dollars they need to enroll.
Fishman wrote that the department should screen applicants for parent PLUS loans on their ability to pay, not just on their credit record, because otherwise too many well-meaning parents will pile up debts that they can’t afford. She said the department should also consider capping the loans — which are now limited only by the cost of attending college — or ending the loan program altogether.
“The government should not be in the business of lending loans to low-income parents as a de facto extension of the student loan program,” Fishman wrote. “To compensate for the loss of the program, policymakers should increase dependent student loan limits.”
Parent PLUS loans, with an interest rate of 6.41 percent, are more expensive than federal student loans. One widely used student loan is available at 3.86 percent. But the government caps what students can borrow at that rate.
Fishman’s analysis found that historically black colleges were not the only ones affected by the change in federal lending.
At for-profit colleges, the report found, the number of students whose parents received PLUS loans fell more than 50 percent from 2011 to 2013. The schools with the largest decline in parent PLUS loan recipients in that time, the report found, were ITT Technical Institute-Indianapolis, DeVry University-Illinois and the University of Phoenix-Phoenix — all operated for profit.
Fishman also found evidence that some colleges include parent loans in their financial aid packages.
“When a college packages PLUS loans in financial aid award letters, it makes the college seem more affordable than it really is,” she wrote. “Many families believe they have no other choice to fill the gap than take out a PLUS loan.”