The federal government offers a variety of college loan “products” and one of them is aimed at parents of students. Under these loans (called Parent PLUS), parents can borrow without limit to cover college expenses for their children. Lots of parents are taking out such loans and average balances, adjusted for inflation, have quadrupled since 1994.
In today’s Martin Center article, Preston Cooper of the American Enterprise Institute examines these loans. He argues that they run afoul of the logic of consumer lending:
For most loans, the individual or entity who pays back a loan also receives the benefits of the assets financed by the loan. A family with a mortgage lives in the house the mortgage paid for. Someone with an auto loan can use the car he financed to get to work and earn money to make loan payments.
Education generally (but not always) provides students with a boost to their earnings prospects. The expectation of higher future salaries means students can justify taking loans to pay for college. Larger increases in earnings potential justify larger loans. That’s why one can justify borrowing $5,000 for an associate’s degree from a community college, but $150,000 for a law degree from an Ivy League school.
But when parents of college students go into debt to pay the tuition bill, they get none of those earnings benefits. Students may sometimes help their parents repay PLUS loans, but at the end of the day, only the parents are liable for the debt. The result: the amount that a parent borrows from the federal government may be entirely unrelated to her ability to pay it back.
Additionally, there is a predatory aspect to Parent PLUS lending, since the government allows people to borrow even though it has already determined through the education department, in its analysis of financial need, that the family has no ability to help support a college student.
Cooper would like to see this type of lending abolished, but despairs of that happening.
Parent PLUS loans represent big government at its worst. The Department of Education does parents no favors by loading them up with high-interest loans while barely considering their ability to repay. As the program continues to spiral out of control, taxpayers’ exposure will rise, as will college tuition. There was never any good reason for the government to lend to college students’ parents. There’s still no good reason today.