Understanding Adverse Credit
Unlike many other forms of credit, Federal Parent PLUS Loans don’t look at your credit score or your income to debt ratio. Instead, Federal Parent PLUS Loan eligibility requires that the borrower does not have an adverse credit history. This will require a credit check to determine, but it is much different from other credit scoring systems. Ultimately, adverse credit history is a criteria to assess if the parent borrower has demonstrated poor financial habits.
A 90-day or more delinquency of debt of $2,085 or more from one or more outstanding balances.
Being in collections during the two prior years of $2,085 or more from one or more outstanding balances.
Having a charge off/write off during the two prior years of $2,085 or more from one or more outstanding balances.
Enduring a default determination during the five prior years.
The presence of a discharge of debts in bankruptcy, foreclosure, repossession or tax lien during the five prior years.
Having your wages garnished during the five prior years.
Landing a tax lien or a write-off of federal student aid during the five prior years.
The federal government does offer two ways for parents with adverse credit history to still borrow.
The federal government does offer two ways for parents with adverse credit history to still borrow. The first option to explain extenuating circumstances behind the adverse credit to the satisfaction of the US Department of Education. Most often this is happens when a borrower can provide evidence the adverse credit history no longer applies based on an updated credit report. In other circumstances, this may occur because the borrower could demonstrate six months of voluntary, consecutive, on-time, full monthly payments to rectify the debt by a letter from the creditor showing balance in question. If the documented extenuating circumstances is granted, then the parent borrower will have to complete PLUS Credit Counseling.
Another option is to add an endorser to Federal Parent PLUS Loan application. Endorser are similar to a cosigner because their credit is pulled to review and the debt will be listed on credit report. Endorsers are different from cosigners because they only need to agree to repay the Federal Parent PLUS Loan if the parent borrower does not repay it.
Endorsers must not have an adverse credit history as defined above. Also, the student on whose behalf the parent is borrowing is prohibited from being the endorser.
One way some parents overcome adverse create when it was caused by 90-day or more delinquency of debt is to make satisfactory payments. Typically, this will take several weeks to record and update all credit bureaus. In such cases, the parent borrower will need to then reapply for the Federal Parent PLUS Loan to pass the credit check.
Colleen MacDonald Krumwiede is a financial aid expert after over a decade of financial aid experience at Stanford GSB, Caltech, and Pomona College and another decade at educational finance and technology companies servicing higher education. She guides go-to-market strategy and product development at Pay4 to transform the way families afford college.