NCHELP just published this gem:
Yesterday, Senator Chris Dodd (D-CT), senior member of the Senate Health, Education, Labor, and Pensions Committee, along with a group of Senators introduced S. 2985, the “PLUS Loan Borrower Protection Act,” to ensure that parents can still qualify for federal PLUS loans in the event that they have had trouble making mortgage payments. When applying for a PLUS loan, borrowers must submit financial information required for a credit check. Under current law, a borrower can be deemed ineligible for a PLUS loan if they have been delinquent on mortgage payments for more than 90 days or if they have gone through a foreclosure in the previous five years. According to information issued by Senator Dodd, S. 2985 would keep parents and students from being disqualified from receiving PLUS loans if they have been delinquent on payments or have experienced a foreclosure on their primary residence during the recent mortgage crisis.
“Ensuring that students have affordable options to finance a college education should be one of our highest priorities,” said Dodd. “Students should not be denied access to PLUS loans simply because our housing market was mismanaged – that is both unacceptable and wrong.”
I’m going to break from what I’m sure is industry standard here, so let me be clear the following is my opinion only and does not represent any official position of the Student Loan Network.
This is a bad idea. This is a VERY bad idea. Here is why:
If a family has already been foreclosed or is badly delinquent on their mortgage, a PLUS loan will only add to their debt.
The first rule of getting out of debt is to stop digging the hole deeper.
The likely outcome of this legislation is simple. Parents will borrow the PLUS loan, find that the thousands of dollars of additional debt will get piled onto their existing debts, be unable to pay either their mortgage or their PLUS loan, default on the PLUS loan, and the American taxpayer will pick up the tab.
On top of that, the parents will find the unpleasant surprise that federal education loans such as the PLUS loan are non-dischargeable in bankruptcy except under extremely narrow circumstances, so they’ll be saddled with debt they can’t get rid of, even if they can discharge their mortgage.
Let’s recap. The parents lose because they get to take out additional, non-dischargeable debt. The lenders lose because they get loans from people who are expressly borrowing beyond their means and ability to repay, and lenders will not recoup 100% of the loan value. The taxpayers lose because they have to pick up the tab on a government-guaranteed loan.
Who wins in this scenario? The politicians, for crafting a feel-good piece of legislation that they can point to and claim they did something.
“Ensuring that students have affordable options to finance a college education should be one of our highest priorities,” said Dodd. “Students should not be denied access to PLUS loans simply because our housing market was mismanaged – that is both unacceptable and wrong.”
For good or ill, the parents of the students made bad choices. Should the students be penalized for parents not fully understanding what they’re borrowing? In an ideal world, no, but this is not an ideal world. Speaking of priorities, Senator Dodd, in an ideal world, we would not spend $12 billion a month on a war while our students pile on debt and high school dropout rates skyrocket. If education was truly one of our highest priorities, we would be at war with ignorance and not Iraq. But I digress.
You’re probably saying, okay, Mr. Penn, you’re so smart, what’s the solution?
The solution is similar to what we did for graduate students with the Graduate PLUS Loan - a federally backed loan for graduate students that allows them to borrow up to the cost of education with a credit check. The same program should be extended to undergraduate students.
Finally, this last piece of ranting: denying someone a loan because of their inability to repay is in everyone’s best interests, as difficult as it is to say no. Believe me, I work for a lender, and nearly every time we say yes, we make some money. Nearly every time we say no, we turn away profits.
However, it is the responsibility of lenders to turn away borrowers who do not have the ability to repay because it harms everyone in the value chain. No one is served by giving out loans like candy and then experiencing economic shock when the loans go bad.
That’s exactly how we got into the present situation with mortgages.
I urge all Senators NOT to support S.2985 and come up with a better idea, for everyone’s sake.
