Before and During College: Hey Parents, If You Really Need a Federal PLUS Loan But Have an Adverse Credit History, Here’s What to Do

Melissa’s a widow with three children and a $50,000 per year income. She’s proud of her oldest, Madison, a daughter who’ll start at the state’s flagship university in August.

The total cost of attending the university during Madison’s first year is predicted to be $29,000.

With two children still at home, Melissa can afford to give Madison just $200 a month for each of her nine months at school. So Madison’s determined to save $3,000 from her summer job and earn another $3,000 from part-time jobs while enrolled.

Madison’s financial aid for the year consists of grants and scholarships totaling $9,500, plus the $5,500 maximum a freshman may borrow from the Federal Direct Loan Program (FDLP).

This leaves Madison $800 a month short of what she needs. So Melissa consulted the financial aid office. She came away convinced that borrowing an FDLP Parent PLUS loan of $7,000 is the only way to send Madison to the university.

Unlike other federal college loans, the U.S. Education Department (ED) runs a credit report on each PLUS applicant. It disqualifies anyone with an “adverse credit history.”

ED would consider Melissa’s credit history “adverse” if her credit report shows that:

• She’s 90 or more days delinquent on one or more debts which, collectively, equal over $2,085; or

• During the last two years, she had more than $2,085 in debt placed in collection or charged off; or

• In the last five years she:

• Defaulted on a debt, suffered a foreclosure, or had something repossessed; or

• Had a federal student loan debt charged-off or written-off; or

• Was subject to a wage garnishment or tax-lien.

Melissa can still qualify by undergoing PLUS credit counseling and:

1. Obtaining an endorser (who agrees to repay the loan if Melissa can’t) without an adverse credit history. Madison, the loan’s beneficiary, can’t be the endorser.

2. Providing documents convincing ED that her adverse credit rating is based on inaccurate information.

3. Sending documentation that persuades ED her adverse credit situation is subject to “extenuating circumstances.” Example? If Melissa defaulted during the last five years, providing ED with a letter from the debt’s current owner or loan servicer confirming she met its conditions for resolving her default could prove an extenuating circumstance.

For more guidance, see ED’s Document Extenuating Circumstances (Appeal) instructions on the Federal Student Aid website.

Even if she qualifies for a PLUS loan, Melissa should tap any other financial resources available to her instead of borrowing it. PLUS is the costliest FDLP loan. It generates debt. But it doesn’t improve Melissa’s earning potential at all.

Nevertheless, because incomes and grants haven’t kept pace with inflation, PLUS has increasingly become a necessity for college parents such as Melissa.

Contact College Affordability Solutions for free consultations on strategies that can help make postsecondary education more affordable before, during, and after college.

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