Ben Miller responded to my post on PLUS loans yesterday and brings up a number of points which I’d like to address.
- the U.S. Department of Education sent a letter to 921 schools in the Federal Family Education Loan (FFEL) Program that had more than 80 percent of their volume with a single lender.
My main issue is that this letter went out to these 921 schools in 2007, so wouldn't this issue have surfaced back then? If there wasn't much difference in DL and FFEL denial rates back then, I'd be inclined to mark up current disparities to craziness in the financial markets. Either way, the solution to this problem is get rid of the monopolies at those schools.
- the denied PLUS applicants may be less likely to shop around, perhaps based upon the assumption that if that lender turned them down so will everyone else. In that case, if a lender denies a PLUS loan but then offers a private option right away, it may be very attractive to the parent.
- First, if lenders feel like the risk of a PLUS loan isn’t worth it, shouldn’t they have similar feelings about Stafford loans?
Thus, pretty much any graduating student with a decent job will be able to make the payments on their Stafford loans, even if they take out the max. Lenders will therefore be willing to lend. The story is different for PLUS loans, since lenders know that the borrower has probably already maxed out on Stafford loans (meaning the student is unlikely to be able to help repay), and that the parents couldn’t get a better deal on a home equity loan (meaning they probably already have debt issues), both of which make default, and therefore PLUS denials, more likely.
- But the issue is not with the rate of PLUS loan denials, it’s the difference in that rate between the two programs. I can’t believe that the borrower populations in the two programs is so different that the denial rate in FFEL would be double what it is in the Direct Loan Program. And that’s what caused the red flags to go up.
Which of these stories is right hinges on how monopolistic student lending is. I’m still not sure that enough big schools have 1) a monopoly and/or 2) unethical financial aid officers to produce the reported aggregate figures. But I could be convinced otherwise.