FAFSA Delays Are Only Part of the Problem

December, 2023

Washington — A bipartisan group of thirty-seven U.S. senators recently wrote urgently to the Secretary of Education, troubled by a delayed rollout of the latest version of the Free Application for Federal Student Aid (FAFSA).  The new version permits an additional 1.5 million financially-needy students a maximum Pell Grant.  The senators wrote:

While the simplified FAFSA is meant to provide more students with federal student aid, we fear the most vulnerable students will be negatively impacted by these delays.

I asked a score of higher education experts not about the delays, but perhaps more importantly about how much the new FAFSA would actually help the financially needy once it is implemented.  They demurred, knowing that it is one thing to increase grant awards, but it is quite another to know how students' entire financial aid packages will look as a result.  

Many colleges prepare the aid packages behind closed doors.  They often see advantages for themselves in adding loan burdens onto students and parents by shuffling fungible grant aid away from needy students to meet institutional goals of enrolling students at the least possible cost to themselves, and not one dollar more.  Increasingly, this is being done by AI. 

Buyer beware. 

One of the worst "awards" in a financial aid package is a federal Parent Direct PLUS loan.  It is so bad that many colleges will not, on ethical* grounds, include such a loan in an aid package.  But thousands of colleges do.  The application is simple and the warning signs in the loan application are easy to miss.  

Here are three quotations to watch for in the application process if you are a parent and a college encourages you to borrow Parent Direct PLUS.  

• "Loan Amount Requested:  For each academic year, you may borrow up to—but not more than—the school's cost of attendance, minus the amount of other financial assistance received."

Beware:  An alert consumer will recognize that the amount of the loan proceeds to be paid to the college can be raised by the college itself by reducing the amount of "other financial assistance received," much of which is under the college's own control.  Institutional grant aid is often used as a strategic tool for exactly these purposes; federal SEOG and state grant programs may also be fungible.  Note that the college has every reason to maximize parent borrowing because it is the recipient of loan proceeds while bearing none of the risks of default. Parent Direct PLUS loans are a cash-cow for colleges that chose to exploit families for their own benefit.  Too many students drop out under the weight of family debt.

• "To qualify for a Direct PLUS Loan, you must not have an adverse credit history. If the credit check shows that you have an adverse credit history, we will explain how you may still be able to qualify for a Direct PLUS loan."

Beware:  Colleges often advise parents, even if parents believe they will not pass an adverse credit check, that they should apply for Parent Direct PLUS because if they are turned down, their students will be classified as independent and will be eligible to borrow more in their own right.  However, parents should know that the credit check, performed by contractors of the U.S. Department of Education, was weakened in 2014 through negotiated rulemaking under pressure from colleges, so parents may find themselves qualified in spite of believing they cannot afford to repay.  Moreover, even those who fail can qualify if they claim "extenuating circumstances" or get a co-signing sponsor.  Incentives for abuse abound.     
   
• "Before you can receive a Direct PLUS Loan, you must complete a Direct PLUS Loan Master Promissory Note (Direct PLUS Loan MPN), which explains all of the terms and conditions of Direct PLUS Loans and is your legally binding agreement to repay all Direct PLUS Loans you receive under the Direct PLUS Loan MPN."

Beware:  Colleges often congratulate parents on qualifiying for Direct PLUS "awards" before parents understand that the interest rates for such loans are much higher than for other federal student loans and that origination fees are also much higher.  They do not advise parents that they have a right to know, under federal regulation [34 CFR § 668.42 (b)(3) and (4)], if they were targeted behaviorally and demographically by a college's AI algorithm as meeting criteria for Direct PLUS packaging, let alone how that algorithm was developed.  Also, parents are almost surely unaware that the Parent Direct PLUS is the only federal student loan that makes money for the U.S. Treasury, which creates an incentive on the part of policymakers not to look closely at what thousands of colleges are doing to put families into debt from which they may never recover.   

Note to Congress and to parents:  The links below provide a primer on these issues.  After you read them, you may wonder if all this is actually legal.  It's a good question.  Manipulations and deceptions by colleges may violate consumer protection laws; price-fixing may be involved if one subscribes to a recent statement of the Department of Justice about universities that covertly and systematically withhold institutional grants from financially needy students. 

An overview: https://opportunityamericaonline.org/wp-content/uploads/2017/04/THE-U.S.-MAKES-IT-EASY-FOR-PARENTS-TO-GET-COLLEGE-LOANS—REPAYING-THEM-IS-ANOTHER-STORY.pdf 

Defaults: https://www.newsweek.com/2021/07/30/parent-loans-fraught-peril-default-rates-hit-20-30-percent-many-colleges-1610943.html 

*Ethical issues: https://www.nasfaa.org/news-item/26254/Parent_PLUS_Loan_Packaging_Comes_Under_Scrutiny ["And the problems plaguing the program over the years have been well-documented. Numerous reports have identified issues and potential solutions, ranging from a lack of strict federal standards on the loans to the fact that there are no measures in place to hold institutions accountable who encourage parents to borrow beyond their means."]

Algorithms and AI:  https://www.brookings.edu/articles/enrollment-algorithms-are-contributing-to-the-crises-of-higher-education ["The prevailing evidence suggests that these algorithms generally reduce the amount of scholarship funding offered to students. Further, algorithms excel at identifying a student’s exact willingness to pay, meaning they may drive enrollment while also reducing students’ chances to persist and graduate."]

Algorithms and debt: