How Fixing an Educational Loan Program Hurt Black Students

The number of black students enrolled at four-year universities and colleges across the United States declined in 2012-13, a year after the federal government tightened credit standards for issuing loans to parents. The declines for blacks were greater than for students of other races and ethnicities, according to a quantitative analysis conducted for the U.S. Department of Education’s research arm and published April 14, 2015.


Historically black colleges and universities, where black students make up more than 80 percent of the student body, were particularly hard hit. The number of recipients of federal parent loans fell 46 percent, compared to a 29 percent drop at other colleges that educate students from low-income families*. The steep fall in college loans coincided with a 3.4 percent drop in the number of students enrolled at historically black schools, a loss of almost 100 students per institution on average.

Throughout the United States, universities that serve low-income student populations saw a 1.5 percent drop in black students, on average, or about 12 fewer black students per institution. Universities and colleges that serve higher-income students saw a 0.6 percent drop in black students, on average, or about three per institution.

“This is a tough, touchy issue,” said Rachel Fishman, a policy analyst at the New America Foundation. “I agree the numbers don’t look good and you’re turning off access to higher education. But these loans were saddling low-income parents with debt they couldn’t afford to repay.”

Better types of loan programs are being debated, but haven’t yet been created. As it stands now, the federal government caps the amount of money that undergraduates can borrow each year, and these maximum amounts are often not enough to pay for college. Many students turn to their parents, who are allowed to borrow the full cost of attendance under the federal Parent Loans for Undergraduate Students (PLUS) program. With soaring tuition, this parent loan program has become a major source of college financing. Thirteen percent of all dependent undergraduates have parents with PLUS loans. Each loan averages almost $13,000 a year.

Default rates grew alarmingly high on these parent loans. And in 2011 the federal government quietly changed its underwriting standards and began denying PLUS loans to parents with marred credit histories. A delinquent mortgage payment or medical bill during the financial crisis would have been reason to deny a loan. Denials spiked, especially among black families. Historically black colleges saw the impact immediately, and complained.

The Education Department’s research arm, the Institute of Educational Sciences, commissioned Mathematica Policy Research to calculate exactly what the consequences were. The result is this paper, Changes in financial aid and student enrollment at historically Black colleges and universities after the tightening of PLUS credit standards.

Other types of financial aid, such as direct student loans and work-study programs, did rise, but not enough to replace the lost dollars from these federal parent loans, the study found.

The study looked at only four-year non-profit colleges and universities. It is possible that the black students who couldn’t get enough loans through their parents to afford a four-year school ended up going to a two-year community college. But Matthew Johnson, one of the authors, pointed out that enrollments declined at community colleges during this time period, and it’s unlikely that all of these black students found a more affordable college to attend.

Johnson also investigated whether something else other than changes to the parent loan program — such as changing economic conditions or housing prices —  might have caused the decline in the number of black college students, but couldn’t find any other factor.

“The signs kind of point this way. It was the PLUS loans changes that had a significant association with declines in black in enrollment,” said Teresa Duncan, director of the Mid-Atlantic Regional Education Laboratory of the Institute of Educational Sciences, which commissioned the study.

The new stricter credit requirements were somewhat relaxed starting last month (March 2015). For example, parents can now obtain loans if their delinquent debts don’t exceed $2,085.  It is of course unclear how much parent loans will rebound this fall, but New America’s Fishman doesn’t expect them to return to pre-2012 levels.

The problem, according to Fishman, is that the federal parent loan program doesn’t factor in a family’s income or ability to pay. It gives unlimited loans — up to the cost of the child’s university tuition and fees —  even to parents who are so poor that they qualify for the maximum federal Pell grant of $5,730. That could be a parent living under the poverty line, who couldn’t possibly pay back $50,000 of college loans. Parents can end up in retirement with their social security checks garnisheed and too little to live on.

“What we really need to do is figure out if we want parents, especially low-income parents, to take on this debt,” said Fishman. “Is this the best public-policy solution for financing higher education?”

Fishman argues that low-income students would be better served with more financial aid from colleges, more grants from the federal government and more student loans — but ones whose repayment plans are based on a student’s future earnings.

* A school would be in the low-income category if 64 percent or more of the students qualify for a federal Pell grant. That mirrors the poverty rates at historically black colleges. Typically, family income of Pell recipients is below $50,000, but it can be higher depending upon family size.

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