PLUS Loan Salvation! Department of Education to Reverse Adverse Scrutiny on Parent Credit
August 14, 2014

Starting in 2011, scrutiny on parents’ credit when applying for PLUS loans intensified and saw tens of thousands of students hard hit when loans were denied. Minority and low-income students were the ones most affected and many had to drop out of college because they were capped out on what they could borrow and PLUS loans were what allowed them to stay in school. The situation was so dire that a year after the changes were made, an advocacy group representing historically black colleges and universities was considering a lawsuit against the Obama administration but tabled it in light of the 2012 election.

Reversal of PLUS loan policy coming soon!  Image Source: Flickr Creative Commons User bradleypjohnson

Reversal of PLUS loan policy coming soon!
Image Source: Flickr Creative Commons User bradleypjohnson

Reversal of an Unpopular Policy

But it seems that public pressure has won out and the administration has reversed its decision to tighten credit scrutiny on parents and students for PLUS loans. Under the new rules, $2,085 of past-due debt will be excused from consideration. For example, if your parents had $2,000 in overdue debt, the rule change would preclude them from being approved for a loan to benefit your education. Now, you would be a-okay and they would be approved for the loan. At the threshold of $2,086 of bills that are overdue by 90 days, PLUS loan denials would be issued.

The Department of Education is also loosening the criteria on how far back the credit scrutiny goes. Currently, they look at five years of financial information and this will be reduced to two years when the new rules come into play this year. This will not apply to bankruptcy, which will still be considered for five years after filing.

More Students Will Be Able to Stay in School, But at What Cost?

Secretary of Education Arne Duncan says, “These changes allow us to continue to be good stewards of taxpayer dollars and open the doors of college to ensure all students have the opportunity to walk through them.” In addition, some of those that are denied may be able to negotiate for an approval by pleading extenuating circumstances through an appeals process. Historically, this appeals process hasn’t provided a staggering number of reversals. But the new rules would require those that gain an approval through the appeals process to receive special loan counseling.

The Education Department has estimated that 371,000 borrowers who have been denied would gain approval under the modified rules. This will help low income students stay in college, but it may not be helping their parents. These are parents that are already struggling to pay their own bills and now will be burdened by loans for their kids’ college at interest rates of greater than 6%. These are loans that are typically not dischargeable in bankruptcy and can follow parents into retirement and trigger garnishment of social security.

Final Thoughts

As we wrote yesterday, for many students, it doesn’t seem fair that parents’ financial circumstances are evaluated since they have no obligation to help pay for school and many parents don’t choose to help. We also addressed whether it’s reasonable for students to ask parents on tight budgets to help pay for school. With low-income parents, in particular, would it not be more reasonable for the student to seek a more affordable school rather than bankrupting (in many cases, literally) their parents? It’s a personal decision for every family, but if you’re tapping out the maximums on student federal loans, perhaps it’s time to consider a cheaper school rather than more debt.

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