The Future of History—PLUS Loan Adverse Credit History, That Is
PLUS Loans have been in the news in the last few years. Specifically, the topic of interest has been the impact of an adverse credit history on PLUS Loan applicants. For nearly twenty years, the PLUS Loan program had no noteworthy issues. However, in 2011 the U.S. Department of Education (ED) modified the criteria to include unpaid collection accounts and charge-offs in their review of PLUS applicants’ credit history. This was to be more closely in agreement with then current regulations. This change was not officially announced before implementation, but rather felt by applicants and schools. Since that time, after much public opinion was expressed, and some intermediary proactive notifications by ED to applicants who may gain eligibility after a credit history reconsideration, a slow move to change the regulations related to adverse credit meandered through the regulatory process. The Federal Direct PLUS Loan final regulations were published on October 23, 2014.
The final regulations were scheduled to be operational as of July 1, 2015. But, ED stated in the preamble to the rules that it may implement an earlier effective date. ED subsequently published in a January 27, 2015, Electronic Announcement that the effective date of implementation of the final regulations will be March 29, 2015. In preparation for the revised regulations, there are several points that schools need to keep in mind as they plan for the changes.
Adverse Credit History Described
The new regulations stipulate that a PLUS Loan applicant is considered to have an adverse credit history if, at the time the credit check is performed, the applicant has one or more debts where the total combined outstanding balance of those debts is greater than $2,085, and they:
- Are 90 days or more delinquent, or
- Are in collection or have been charged off during the two years preceding the date of the applicant’s credit report,
The above criteria are in addition to the historic prohibitions that also create an adverse credit history for PLUS Loans. These include bankruptcy, a tax lien, or a student loan default. It is important to note that the conditions for adverse credit history are applicable to parent borrowers or graduate or professional student borrowers.
Eligibility Determination after Adverse Credit History Determination
A PLUS Loan applicant who had an adverse credit history may still be determined to be PLUS Loan eligible in two circumstances:
- If the applicant satisfactorily meets the extenuating circumstances provision in the regulations, or
- If the applicant obtains an endorser.
ED is also extending the duration of time for which the credit check for a PLUS Loan applicant remains valid. The result of a credit check has remained valid for 90 days heretofore. As a result of the changes being implemented with these new regulations, ED has announced that a PLUS Loan applicant’s credit check result will remain valid for 180 days. This change likewise occurs on March 29, 2015.
PLUS Loan Counseling
If an applicant with an adverse credit history is subsequently determined to be eligible, the borrower must complete PLUS Loan counseling. This counseling is provided by ED, not the school. In fact, it is not an option for the school to provide this counseling. It must be accomplished via ED’s StudentLoans.gov Web site. PLUS Loan applicants must be aware of the fact that the PLUS Loan counseling has to be completed in one sitting. That is, if the applicant begins the counseling it must be completed during that sitting. No information is saved to allow for an applicant to begin, and then stop during the process, and later come back to where he or she was previously. There is a demonstration of the counseling available outside authentication (prior to logging in to the site).
Of note is the fact that this PLUS Loan counseling is not the same as student loan entrance counseling. If a borrower is otherwise required to complete entrance counseling (e.g., first-time borrower graduate or professional student) and also will obtain a PLUS Loan after an initial adverse credit history determination, the applicant must complete the required PLUS Loan counseling in addition to the student loan entrance counseling. The PLUS Loan counseling must be completed prior to the disbursement of the PLUS Loan funds.
The PLUS Loan counseling is applicable to both parent borrowers and graduate or professional borrowers. Any applicant may complete the counseling. It is not limited to PLUS Loan borrowers who had adverse credit history determinations. It is important to note that the PLUS Loan counseling is applicable for the duration of the credit check validity (180 days from the date the credit check was performed). Therefore, in some cases, a borrower may have to complete PLUS Loan counseling (e.g., a second disbursement occurs more than 6 months from when the initial credit check occurred).
Implementing the New Regulations
Schools should ensure that they are prepared for the early implementation of the new regulations. Accordingly, all information the school has developed related to the PLUS Loan application process should be updated to incorporate the parameters of the new rules. Specifically, information should be updated regarding the new adverse credit criteria and the requirement for PLUS Loan counseling for those who were originally determined to have adverse credit but were subsequently determined to be eligible, as described above. Updates should be made in any communication formats the school currently uses, whether in print or electronic (school’s Web site, social media, etc.)
Beyond the consumer information dissemination that is necessary for PLUS applicants, schools should also prepare staff from an operational standpoint. The Common Origination and Disbursement (COD) system will have new indicators (tags on the record) that confirm all credit related requirements have been met and that the PLUS Loan may be disbursed. The credit related requirements refer to the borrower having an approved endorser or approved appeal, and that PLUS counseling has been completed. (This does not mean other requirements have necessarily been met, such as having a linked Master Promissory Note, or appropriate enrollment status, etc.)
COD will also provide new responses and reports that will enable schools to know applicants’ status in the process. For example, information will be provided regarding the original credit decision, the credit decision expiration date, those who have met the credit requirements in the past 30 days, etc. This information will be beneficial as staff work with students and PLUS Loan applicants.
Schools should analyze and plan for how the new PLUS Loan final regulations related to adverse credit will impact its operations. As a result, a school should determine which of their policies and procedures need to be modified or created.
- How will the school notify applicants of the status of their PLUS Loan request?
- How will the school monitor and work the results of credit checks and adverse credit determinations?
- Does the school have a plan for explaining the need for PLUS Loan counseling, which applicants are required to accomplish it, and how often the applicant may have to complete it?
- How will the school individually notify the applicant of the need for PLUS Loan counseling?
- What method will the school use to track the applicants that need to complete PLUS Loan counseling? (For example, will you use the COD response files and reports and/or develop your own spreadsheet, list, etc.?)
- Will you notify prior 2014-2015 PLUS Loan applicants of the new adverse credit criteria who were not eligible based upon the prior adverse credit criteria for possible reconsideration?
As the new PLUS Loan final regulations become effective, financial aid administrators will undoubtedly find opportunities to assist more individuals through the PLUS Loan process. It is important to be prepared for this new point in time, as you work to help create a new future in spite of some applicants’ history.
This article is presented for informational and educational purposes only and should not be considered to be giving legal advice.