Ask a Hero: What is ‘Adverse’ Credit for Student Loans?

 October 15, 2019
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Dear Student Loan Hero,

I’m a mom applying for a [Parent] PLUS loan through the federal government. My son tells me I should be able to borrow on his behalf if I don’t have “adverse” credit. What exactly does that mean? How do I know if my credit will be good enough? I’m concerned I won’t be able to help my son pay for his next year of college.

Dear Student Loan Borrower,

Unfortunately, student loans have a language all their own, and “adverse” is just one of many terms that could be misleading.

You might think the “adverse” requirement for Parent PLUS Loans refers to your credit score, for example. In fact, your score has no bearing on your fitness for federal student aid.

Here’s what could block your access to PLUS Loans, along with how to potentially overcome it.

What’s an adverse credit history?

When applying for a PLUS Loan, the Department of Education will perform a credit check. If they turn up either of the following, your credit history could be classified as too “adverse” to qualify:

  • You’re 90 or more days late on repaying a debt (of any kind) of at least $2,085.
  • You’ve experienced a default, bankruptcy discharge, repossession, foreclosure, wage garnishment, tax lien or federal student aid write-off during the last five years.

Checking your credit report is the fastest way to confirm whether you one have of these events in your past.

There’s also no harm in applying for a Parent PLUS Loan even if you’re unsure of your credit history. Receiving a PLUS Loan denial could increase your son’s federal aid allotment. He would be treated as an independent student and could take out as much as $4,000 to $5,000 more in Direct Subsidized or Unsubsidized Loans, depending on his year in school.

Your son maximizing his Direct Loan borrowing might make more sense anyway. Subsidized and Unsubsidized Loans (4.53% for the 2019-2020 school year) carry significantly lower interest rates than those of PLUS Loans (7.08%). On the downside, he’d have more debt to repay under his own name.

Can you borrow a PLUS Loan with adverse credit?

Having an “adverse” credit history is an obstacle, but not a wall to PLUS Loan borrowing. You could overcome it and still help your child afford college in one of two ways. Both would call for PLUS Loan credit counseling, which is a 20- to 30-minute online training on federal loan repayment.

  1. Find some support: Although there’s no such thing as a cosigner for federal student loans per se, there are endorsers. Piggybacking on an endorser’s stronger credit history could help you qualify for a PLUS Loan and keep your son enrolled. Just be sure to explain to your potential endorser that they would be responsible for repaying the loan if you’re not able to go it alone.
  2. Document extenuating circumstances: You could challenge the Education Department’s decision by writing a statement about any extenuating circumstances you might face, including supporting evidence for your situation. Such claims are judged on a case-by-case basis. Although a job loss isn’t justification enough, your appeal could be successful if you prove you meet eligibility requirements. You could show, for example, that you’ve rehabilitated a defaulted loan appearing on your credit report.

There’s also a third option to help ensure your son stays in school and on track for his degree — private student loans.

If you have a spotty credit history, it might be difficult to receive a loan in your name. After all, private loans (unlike federal loans) base your eligibility — and the interest rate you receive — on your credit score. It’s likely, for example, that a delinquent debt or past default that would block a Parent PLUS loan would also harm one’s credit score.

Instead, your son could try to qualify for a private loan on his own. He could also bring an alternate cosigner aboard.

Keep in mind that private loans don’t include many of the repayment protections you might have come to expect from federal loans. Income-driven repayment, deferment, and forbearance are much harder to find among banks, credit unions and online lenders.

As you and your son weigh these options, have a look at these reports, which could also prove useful:

Good luck in life and repayment,
Andrew P.
Student Loan Hero

Read more in the Ask a Hero series.