Department of Education Submits Plan to Disgregard Certain Delinquencies
October 24, 2014

Earlier this week, the Obama administration finalized a plan, whereby parents with damaged credit histories could gain greater levels of access to federal student loans. This would help them cover their children’s undergraduate expenses.

Sterling College Students by Sterling College, on Flickr

Sterling College Students by Sterling College, on Flickr

In his article, Josh Mitchell mentions that the Education Department plans to implement the new measures by next spring. As part of the new rules, the agency will:

–        Check the past two years of the borrower’s credit history for delinquencies or debts in collection that could disqualify Parent Plus applicants (as opposed to the current standard of five years)

–        Disregard any delinquent debts below a cap of $2,085 (as opposed to the current standard of rejecting applications for delinquencies of any amount)

These loans will cover tuition and living expenses, when the undergraduates exhaust the limits on their federal Stafford loans.

Administration officials believe that the new rules will boost college enrollment, especially among the disadvantaged youth, as these individuals often do not have savings or any other means for paying for college. Despite this however, some consumer advocate groups have criticized the new plan.

These groups believe that the plan needs a safeguard to prevent excessive borrowing. For example, a possible safeguard could be a review mechanism that tracks a person’s income for determining the individual’s ability to repay the loan. Without this, even families having modest or no incomes – including those receiving disability pay and in retirement, would still be able to borrow several thousand dollars in Parent Plus loans. The increased levels of debt could have serious repercussions over the lifetime of the borrower in several ways. For instance, the greater the debt the borrowers have, the lower their chances of being able to purchase their own homes.

NeighborWorks America is a national, nonprofit, affordable housing and community development organization. In a recent telephonic survey that covered 1,000 Americans, they examined the burden of student loans on prospective homeowners. They found that:

–        About 24 percent of the respondents knew someone whose student loan debt had delayed the purchase of a home

–        Another 17 percent of their respondents had a student loan debt currently

–        Of these 17 percent, 49 percent believed that the student loan debt affected their plans of buying a home

According to the survey, the student loan debt affects African Americans and Hispanics the most. These groups constitute about 20 percent of the population and around 29 percent of all people having student loans. These groups also:

–        Take higher loan amounts and,

–        Have lesser earning potential early in their careers

As a result, many of these individuals do not qualify for the loans they seek. Therefore, while education is becoming increasingly critical for professional success, student loan debts will prevent these borrowers from fulfilling their aspirations of owning a home. This in turn, will render thousands of people devoid of the stability and financial value that homeownership offers. Even worse, it could make them defer the decision to purchase a house by several years. In other words, they could find themselves repaying the mortgages on their homes, even as they approach their retirement years.

Thus, for many people, a situation like this becomes a Hobson’s choice. It also means that retirement no longer remains an option within their control.