Showing posts with label Parent Plus. Show all posts
Showing posts with label Parent Plus. Show all posts

Sunday, November 16, 2014

Investment Insights from Student Loan Data

Direct loans are low-interest loans for parents and students to help pay for the cost of post high-school education. Parent PLUS, available through the Direct Loan Program, lets parents borrow money to pay costs not already covered by a student's financial aid package.

The current PLUS interest rate is fixed at 7.21%. The Parent PLUS, combined with other student loans, should lower the student loan default rate. However, we should note that the financial responsibility rests Parent PLUS not on students, but on parents.

When a borrower fails to make their monthly payment at a scheduled point in time, a default occurs. The cohort default rate is the percentage of a school’s borrowers who enter into a repayment agreement on Direct Student Loans during a given fiscal year and default within the period.

Cohort default rates nearly tripled from 2007 to 2010. The US government is now focused on strengthening the Federal Direct PLUS Loan Program to stop the default rate increase.

While the Parent PLUS helps decrease the probability that a student will default on their loan, the program increases the financial burden on parents. Many middle-class parents have found it difficult to repay the PLUS loan. What’s worse, The U.S. Department of Education doesn't analyze or publish default rates for the Plus program in the same detail that it does for other federal education loans. But there are still some data we can reference, shown below (*click on picture to enlarge):

Here are some conclusions:

· PLUS Proprietary has the highest default rate in either graduate or undergraduate student loan.
· The effective default rate increase of Grad PLUS borrowers is 0.28% while the default rate for Parent PLUS 0.30%.
· There are many more Parent PLUS than Grad PLUS borrowers.
· The trend is that the default rate for Parent or Graduate PLUS programs will increase. I expect the default trend for the Parent PLUS program to decrease. Investment implications should be obvious.

Post by:

Creative Investment and NCS Intern Meng Guo, 2014 Master of Science in Finance, Carey Business School, Johns Hopkins University, Washington DC, United States. Edited by William Michael Cunningham.