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Why would a parent be denied a parent PLUS loan?

Published in Parent Loan Denial 4 mins read

A parent may be denied a Parent PLUS Loan primarily due to an adverse credit history, which indicates a significant financial risk to the lender.

Understanding Parent PLUS Loan Credit Requirements

The eligibility for a Parent PLUS Loan, a federal student loan program, heavily relies on the borrower's creditworthiness. Unlike some other federal student loans that do not require a credit check, Parent PLUS Loans necessitate a review of the parent's credit history. This check is specifically conducted to ensure that the parent applying for the loan does not have an adverse credit history.

What Constitutes an Adverse Credit History?

An adverse credit history is the most common reason for a Parent PLUS Loan denial. This term refers to specific negative marks on a borrower's credit report that indicate a significant risk of default. The U.S. Department of Education defines specific criteria for what constitutes an adverse credit history for PLUS Loan purposes.

Examples of Adverse Credit History include:

  • Significant Delinquency on Debt Payments: This means being at least 90 days or more overdue on making payments for various debts, such as credit cards, mortgages, car loans, or other federal student loans.
  • Recent Bankruptcy Discharge: Completing a bankruptcy filing within the last five years is considered an adverse credit event.
  • Other Major Derogatory Marks: This can include a default determination, foreclosure, repossession, wage garnishment, tax lien, or a write-off of a federal student loan within the last five years.

Impact of Adverse Credit on Loan Approval

If the U.S. Department of Education's credit check reveals any of these adverse indicators in the parent's credit report, the Parent PLUS Loan application will likely be denied. This requirement is in place to protect the government as the lender and to ensure that borrowers have a reasonable ability to repay the loan.

Here's a summary of common adverse credit indicators:

Adverse Credit Indicator Description
Delinquent Payments Being 90 or more days overdue on various debt payments totaling more than $2,085 (as of recent definitions, though the specific amount can change).
Bankruptcy Having a bankruptcy discharge completed within the last five years.
Foreclosure/Default Defaults on other loans, foreclosures, repossessions, or wage garnishments within the last five years.
Tax Lien/Write-off Having a tax lien or a debt write-off within the last five years.

Steps to Take After a Denial

If a Parent PLUS Loan application is denied due to an adverse credit history, there are often pathways you can explore to still obtain the necessary funding:

  • Appeal the Decision: If you believe the denial was based on incorrect information, you can dispute the credit decision with the Department of Education. You might need to provide documentation to clarify or correct information on your credit report.
  • Obtain an Endorser: An endorser is someone (like a co-signer) who does not have an adverse credit history and agrees to repay the loan if you do not. This person can be a spouse, another relative, or a friend. Both you and your endorser must complete PLUS Loan Entrance Counseling.
  • Document Extenuating Circumstances: You might be able to document and explain any extenuating circumstances related to your adverse credit history to the Department of Education's satisfaction. This often requires providing evidence that directly caused or contributed to the adverse credit event.
  • Student's Increased Eligibility for Federal Direct Unsubsidized Loans: If a parent is denied a PLUS Loan and cannot secure an endorser or appeal the decision, the dependent student may become eligible for additional unsubsidized federal student aid. This can provide a crucial alternative funding source.

Understanding these credit requirements and the options available after a denial is key for parents seeking to help finance their child's education. Learn more about Parent PLUS Loans and credit requirements on the Federal Student Aid website.