Higher education is often viewed as one of the few routes for upward mobility in low-income communities, where the majority of children never move up the economic ladder. For nearly six decades, federal aid such as Pell Grants have helped low-income families send their children to college. Unfortunately, however, with rising college tuition and reduced state investment in low-cost public institutions, grant aid is frequently inadequate, causing students to turn to the federal student loan programs. A series of policy decisions have compounded the harmful impacts of this trend, however, resulting in families of color already disadvantaged by low-wealth increasingly relying on high-cost debt financing to support their children’s higher education pursuits.
Following the passage of the 1965 Higher Education Act (HEA), which offered students additional financing options including low interest loans and scholarships, college became more affordable for low-income families. As designed by Congress and authorized in the HEA, the low-interest Stafford Loan program—which charged no interest while the student was in school—was supposed to take care of the needs of lower-income students. By the late 1970s higher-income families who, according to financial aid formulas, were able to pay but did not have ready access to cash, also needed support and protection from rising tuition and interest rates. The 1980 HEA reauthorization introduced the Parent PLUS program as a reliable stopgap for these middle- and upper-income parents.
For several decades, the relatively easy availability of student loans worked in concert with other policies to help make college an option for just about anyone interested in attending. The Education Amendments of 1972 further diversified higher education by prohibiting sex-based discrimination and providing financial aid directly to students. While student loans were intended to expand access, their increased use allowed colleges and the government to reduce the focus on aid that did not risk leaving students and their families with severe debt burdens, such as grants and scholarship.
Though student loans today remain a viable resource for families to cover the remaining balance after their college financial aid is awarded, the steady policy retreat from other forms of aid, combined with states’ reduction of support for public colleges and universities, represents a failure to meaningfully invest in the aspirations of low-income, low-wealth families. It is this policy failure that has resulted in the student debt crisis we have today, including the seemingly unending growth of Parent PLUS college loan debt.
As college tuition costs have risen, and as grant aid has failed to keep pace, schools in recent years have been including Parent PLUS loans in their student financial aid packages in ways the program did not intend. The Parent Plus loan program was initially designed to give middle-class parents—who have income and wealth, but not necessarily liquidity—a way to finance their children’s education by taking on debt themselves. But increasingly, schools have been including these federal loans not only in financial aid packages sent to middle-class parents but also to some of the lowest-income families. While the U.S. Department of Education allowed this practice—the only restriction for Parent PLUS loans is that the borrower cannot have a bad credit record—many of the parents now taking out these loans have no realistic way to repay them without major financial hardship and distress.
As my colleague Peter Granville finds in his report about parent borrowing for college, the proportion of Parent PLUS borrowers who had been judged unable to put even a single dollar toward college costs—parents who were zero EFC (expected family contribution) under the financial aid formulas—has risen from 5 percent in 2000 to 17 percent in 2018. The predictable result has been an underclass of parent borrowers, particularly borrowers of color, who are struggling with these federal loans. As the report shows, this trend is marked by some grim characteristics:
- At the three-year repayment mark, more than twice as many Parent PLUS borrowers whose children also received a Pell Grant (indicating the family is low income) had defaulted on their PLUS loans as Parent PLUS borrowers whose children did not receive a Pell Grant.
- Among parent borrowers, Black and Latino/a parents were the most likely to have borrowed from or cashed out their retirement savings account in the prior year.
- One in three of student loan borrowers whose Social Security payments were offset because they had defaulted on their loans had a Parent PLUS loan at some point in time.
- Many more Black parents (33 percent) and Latino/a parents (29 percent) who hold loans for their children’s education also hold student loans for their own education, compared to just 13 percent among white parents who hold these loans.
As part of the federal response to the COVID-19 pandemic, payments on most federal student loans, including Parent PLUS loans, have been suspended since March 2020, when the first public health emergency payment pause and interest waiver was enacted. As the Biden administration has extended the payment pause again and again, borrower advocates and lawmakers have elevated their call for broad-based student loan debt cancellation. Given how great the need for parent borrower relief is, it’s unfortunate the question of whether cancellation should include Parent PLUS loan borrowers has not been prominent in the debate. In fact, the inclusion of Parent PLUS has been almost completely missing from the discussion.
Too often, Parent PLUS loans should not have been made in the first place, given Congress’s intention that they were to be used by middle-income families. While students have the prospect of higher future earnings from a college degree, parents who had no way of repaying Parent PLUS debt were put into the unfair position of having to choose between accepting that debt burden so that their children could thrive, or risking that their children would not begin or finish college at all. In that situation, government-backed loans may have seemed like a viable solution, and many parents—frequently lacking a college degree themselves—took the loans because it seemed like the right thing to do.
Parent PLUS loans have the highest fees and interest rates of federal student loans, and the least access to repayment assistance and forgiveness. Furthermore, because there is no set cap on loan amounts, the Parent PLUS loan program often results in large debt loads. Those approved for a loan may borrow up to the full cost of their child’s college attendance, minus other financial aid, resulting in loan balances that often far exceed those allowed through other student loan programs. Furthermore, the intergenerational element of Parent PLUS loans makes the functional lack of a borrowing limit all the more concerning. Very-low-income students shouldn’t have to rely on their parents, who are unlikely to reap any economic reward from their child’s educational attainment, for such sizable amounts of post-secondary economic support.
The history of the Parent PLUS program and the unfair burdens it has placed on low-income families strongly argue for President Biden to include parent debt in his loan cancellation plan. While advocates of debt cancellation have argued against any targeting because of the complexity involved, from a cost standpoint—and perhaps a political standpoint as well—some targeting seems likely. Fortunately, Parent PLUS debt could be canceled based on criteria that make sense and are available to the federal government. These two approaches could be used individually or in combination to cancel a portion or all Parent PLUS debt for parents who were poor when the student enrolled and/or are poor after enrollment, using simple measures:
- Canceling the debt of Parent PLUS borrowers who had a $0 Estimated Family Contribution (EFC) at the time of attendance. While the EFC has since been replaced by the student aid index, one fact remains true: very low-income and low-wealth families are not able to meaningfully contribute to their children’s education. Unfortunately, while full-need students will receive the maximum aid allotted by their institution, this number may not cover the full cost of attendance causing the student and their family to borrow federal loans. Students with $0 EFCs shouldn’t be eligible to borrow Parent PLUS loans as doing so leaves the student and their family with a balance they can’t afford at the time of attendance and are unlikely to be able to repay. It’s worth noting that Black zero-EFC families have nearly $10,000 more in total debt than their white counterparts.
- Canceling the debt of Parent PLUS borrowers eligible for the Earned Income Tax Credit (EITC). The EITC is a federal tax credit for low- and moderate-income working people. Its qualifying rules take into account the earned and investment income of taxpayers, offering some of them a tax credit to help reduce poverty. EITC-eligible Parent PLUS borrowers are hard working but low income, so those eligible for programs like Income-Contingent Repayment (ICR) are likely making very low payments, if they are asked to make payments above $0 at all.
If the entire debt amount a Parent PLUS borrower owes is not being canceled, the loans could be reduced by a particular dollar amount, or repayments capped at the original principal amount, eliminating interest costs.
Executive and congressional remedies for the current student debt crisis are long overdue, but going forward, the underlying structural issues of high tuition costs and a broken repayment system must be addressed. The decades between the 1980s and 2010s saw tuition at colleges and universities across the country increase at a rate that rapidly exceeded inflation. Unfortunately, because state and federal investments did not keep pace, colleges have transferred the burden of college financing onto students and their families who are paying—and in many instances borrowing—to cover a larger share of college costs. To prevent future students from facing a similar student loan disaster, policy makers must focus in the coming year or two on the issue of college pricing and financial aid.
In the loan programs, repayment options for low-income Parent PLUS borrowers are far too limited, leaving those with outstanding balances few meaningful pathways out of debt. Income Contingent Repayment was intended to offer borrowers a safety net as they navigate repayment and ensure those payments were affordable. Despite this goal, many borrowers continue struggling to make high monthly payments which can result in delinquency and default. Low-income Parent PLUS borrowers could greatly benefit from a redesigned program that prioritized affordability and eliminated administrative barriers.
Unfortunately, without meaningful investment and policy proposals that address the underlying causes of the debt crisis, any efforts to rectify the intergenerational harm done to low-income families through cancellation won’t prevent the cycle from repeating itself as a new group of eager but economically vulnerable students arrive on campus this fall.