The United States government earns $3 billion a year from charging above-market interest on loans made by parents for their children’s college education.
Current student debt in this country exceeds $1 trillion and with programs like federal government’s Parent’s PLUS that number is growing fast.
There are 3.2 million borrowers who owe $65 billion to Parent PLUS who face high interest rates an few loan forgiveness options. Currently, the interest rate for a Parent PLUS loan is 7.21 percent.
As a comparison, a Stafford loan has an interest rate of about half that, 3.9 percent.
Controversially, Parent PLUS loans also have an origination fee of 4.2 percent and is the only federal loan to carry such a fee.
Parent PLUS loan borrowers also face a serious risk of default.
Those who are repaying a Parent PLUS loan are not eligible for income-based repayment (IBR). Essentially the payment rate is fixed, so if you are suddenly out of work, your Parent PLUS payment stays the same and this increases the threat of default.
If you default on a Parent PLUS loan, the government can garnish your wages or deduct from your tax-returns or even your Social Security.
Currently, 13 percent of undergraduates in America have parents who have taken Parent PLUS loans on their behalf.
Parent PLUS loans are not included in institutional default rates the same way that Stafford and Graduate PLUS loans are.
Institutions are therefore, incentivized to push the Parent PLUS loan because they don’t have to calculate the defaults at their schools.
“Parent PLUS is classic predatory lending. It’s not a safe product for many of these families, and the debts will hound them forever,” said Rachel Fishman, an education policy analyst at the nonpartisan New America think tank. “But it’s a cash cow for the government, so it’s going to be extremely difficult to reform.”