What Is ‘Adverse Credit History’ for Student Loans?

 July 29, 2022
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Adverse credit refers to a history of missed or late payments on previous loans or credit cards. Having an adverse credit history may affect your eligibility for federal Direct PLUS student loans.

Let’s take a look at the following topics to see how an adverse credit history can limit your student loan funding and how to potentially overcome it.

Definition: What is adverse credit history?

Although the Department of Education doesn’t perform a credit check for most federal student loans, grad PLUS loans and parent PLUS loans are exceptions: They do look at your credit report when you apply. And if it shows up as adverse (sometimes referred to as “derogatory credit”), you will be denied the loan.

The department deems your credit history “adverse” due to any of the following situations:

  • You’re 90 or more days late on repaying a debt (of any kind) of at least $2,085
  • You’ve had a debt placed in collection or written off within the past two years
  • You’ve experienced one or more of these events during the last five years:
    • Default
    • Bankruptcy discharge
    • Repossession
    • Foreclosure
    • Wage garnishment
    • Tax lien
    • Federal student aid write-off

Accessing your free credit report in advance is the fastest way to confirm whether you have any negative dings from the past. It’s highly recommended to do so to understand the full scope of your borrowing power.

In saying that, there’s no harm in applying for a PLUS Loan, even if you’re unsure of your credit history. Receiving a parent PLUS loan denial changes your child’s status to an independent student, potentially unlocking an additional $4,000 to $5,000 in Direct Subsidized or Unsubsidized Loans, depending on their year in school.

It’s generally a good idea to max out your child’s Direct Loans first, especially since parent PLUS loans usually have higher interest rates. For example, the Subsidized and Unsubsidized Loan rate is 4.99% (for loans issued between July 1, 2022, and July 1, 2023), compared to 7.54% for a parent PLUS loan. However, taking on a parent loan is one way to help reduce your child’s student loan debt.

If you’re a grad student, a PLUS loan has several benefits, such as allowing you to borrow up to the total amount of your school’s attendance minus any aid you’ve already received. If your federal loans and scholarships and grants don’t cover your total expenses, a PLUS loan can help fill the gap. But an adverse credit history may disqualify you from this type of loan.

How to get a PLUS loan with adverse credit

Having an adverse credit history is an obstacle, not a wall to PLUS Loan borrowing. If you know you have adverse credit or get denied on your initial application, you must complete PLUS Loan credit counseling first. This is a 20- to 30-minute online training on federal loan repayment.

Next, you have two options for moving forward:

  1. Find some support: PLUS loans can have “endorsers.” Endorsers are basically the same as cosigners, and they aren’t required for other federal student loans. Piggybacking on an endorser’s more robust credit history could help you qualify for a PLUS Loan. Just be sure to explain to your potential endorser that they would be responsible for repaying the loan if you can’t.
  2. Document extenuating circumstances: You could challenge the Education Department’s decision by writing a statement about any extenuating events you have faced, including supporting evidence for your negative credit score. The Federal Student Aid (FSA) site offers general guidance on the documents needed to support your appeal. 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.

How to improve your adverse credit history

As mentioned earlier, reviewing your credit report is important to understand where the derogatory credit history is coming from. Then, you can come up with a plan to improve your credit score.

It might be hard to get all your finances in order depending on your situation. However, try starting small by meeting all minimum payments, limiting credit card purchases and requesting modified payment plans with any lender who offers them.

An adverse credit history doesn’t need to drag you down forever. Most negative marks eventually fall off your credit report — typically after seven to 10 years. By taking the proper steps now, you can help ensure a more substantial financial status in the future.

How student loan credit standards differ

Loan providers have different credit requirements, which influences their final decision.

Federal direct subsidized and unsubsidized loans don’t require a credit check. Private lenders, however, run a hard credit check and use your credit score to determine your overall interest rate. The better the score, the more appealing the rate.

With PLUS loans, the government looks at your credit history but doesn’t use your score to calculate your final interest rate. It’s a thumbs up or thumbs down type of process. In the end, you qualify if you meet all criteria and have no adverse marks.

What to do if you get denied for a PLUS loan

Remember, getting denied from a parent PLUS loan means your child is eligible to receive additional Direct Loans to help fund their education. Contact their school’s financial aid office to inquire about more funding.

If you’ve been denied a grad PLUS loan or your child needs additional funds beyond their other federal loans, you can consider applying for private student loans.

However, receiving a loan in your name might be challenging if you have a spotty or no credit history. For example, if a delinquent debt or past default blocked a PLUS loan, it would likely limit your options with private lenders.

Here are some workarounds to get a private student loan if you have a bad or no credit history:

  • Add an alternate cosigner: Having your parents cosign your private student loan is usually the first option, but if they have adverse credit you can ask another relative, such as a grandparent, aunt, uncle or even a close family friend. Ultimately, you’re responsible for repaying the loan and any missed payments will ding your cosigner’s credit. Because of this, it’s worth looking into loans that offer cosigner release to help them off the hook sooner.
  • Consider student loans with bad credit: Some banks offer loans for those with a less-than-stellar credit score. In general, these bad-credit loans don’t provide the best interest rates or flexible terms, but they can still work if you’re in a pinch.

A private student loan might offer lower interest rates with no extra fees compared to federal loans. However, pursuing federal aid should almost always take priority since you’ll have access to the following government-funded programs:

These programs are much harder to find among banks, credit unions and online lenders. In the end, a loan repayment program can help reduce your overall student loan debt.