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Department of Education to reconsider PLUS loan policy

By Jeong Park

January 16, 2014 1:17 am

For Michael
Reyes, a first-generation college student, funding a UCLA education seemed like a pipe dream.

Even with several grants and
scholarships, he had a $20,000 gap in funding for his two years at UCLA after he transferred from Santa Monica College.

He turned to the Parent Loan for Undergraduate Students – or PLUS loan – to bridge the financial gap.

“(Without a loan), I would probably be in a community college for a while,” said Reyes, now a fourth-year English student. “It would probably change my whole trajectory for what I want to do and what I want to study.”

The Department of Education is considering several changes to the PLUS loan. The move is in response to some complaints that were received after the credit check to receive a PLUS loan changed in 2011 to cover delinquency in the accounts from five years prior, rather than in current accounts.

This spring, the Department of Education will re-evaluate ways one can be denied a PLUS loan. Currently, parents who have experienced bankruptcies, foreclosures, defaults or accounts in the last five years that are more than 90 days overdue cannot receive a PLUS loan for their children.

The denial rate of the PLUS loan increased from 28 to 38 percent from October 2011 to October 2012, according to Department of Education data.

Although the department did not provide any specific ideas, the Secretary of Education said he wants to make it easier for parents who were denied the loan to secure funds for their children at universities, according to a letter sent to Rep. Marcia Fudge, chair of the Congressional Black Caucus.

Ronald Johnson, director of financial aid at UCLA, said the PLUS loan allows parents more flexibility because they can pay back the loan later.

At UCLA, parents of 1,959 undergraduate students took out a combined $28.8 million in PLUS loans in the last academic year, or about $14,700 per student, Johnson said.

Department of Education officials said they also want to protect parents and taxpayers from the consequences of defaulting on the loan. A PLUS loan has a higher chance of default because it covers up to a full cost of attendance and has a high interest rate of 6.41 percent, said Rachel Fishman, a policy analyst with the New America Foundation, a nonpartisan public policy research institute.

Fishman published a study last week arguing for the tighter restriction of the PLUS loan. She proposed that the government examines an applicant’s ability to pay the loan by considering parents’ income and assets in addition to their credit history. She also suggested a cap to the loan amount or removal of the program entirely.

The tighter restriction will ensure parents can take out a loan that they can afford to pay back, she said.

She said strengthening the restriction for the loan will force universities to examine their tuition costs. Universities will have to focus on how to make an education affordable for poor and middle-class students instead of relying on PLUS loans for funding, Fishman said. She also said it will force parents and students to take the cost of a college into account when students choose what college to attend.

The Department of Education has been expanding its outreach to support parents whose loan applications have been denied.

The department has not decided on what changes it wants to make this year, said Jane Glickman, a press officer for the department.

For students and parents at UCLA, the accessibility of federal loans is crucial to paying for their education.

Although Reyes was able to secure a loan, he said a less strict credit check may have been a big help for his friends.

“Having their parents’ help pushes them a little bit more,” Reyes said. “(The loan) makes it easier to transition from a community college to a UC.”

Christine Henry is a parent of a first-year student who struggled to cover the cost of her daughter’s tuition. She said she and her husband took out a $26,000 PLUS loan.

Henry said without the loan, she would have had to take money from their retirement fund, likely resulting in a penalty for withdrawing money earlier than the bank had anticipated.

She added that changes in the loan policy would not likely lead to much change in deciding what she would have done to fund her daughter’s education.

Johnson said more stringent restriction may be needed to address the concern about families who have loaned the money but do not have the ability to repay the loan.

Johnson said, however, that he urges against creating a very tight restriction for the PLUS loan.

“If the restriction is placed on those loans so that (parents) did not have an access to this capital, it would create some problems,” Johnson said. “At some point, we would be impacted as well. All public institutions would.”

In the spring, the department will discuss the change during a negotiation rule-making session in which a panel of experts will try to come to a consensus in the definition of the kind of delinquency that would lead to a denial of the loan.

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Jeong Park
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