Changes in Underwriting of Federal PLUS Loans

The U.S. Department of Education published new regulations concerning borrower eligibility for the PLUS Loan in the Federal Register on October 23, 2014. Borrowers of the Parent PLUS Loan or Grad PLUS Loan must not have an adverse credit history. The new regulations change the definition of an adverse credit history, partially backing off from a more restrictive set of criteria that was implemented by the U.S. Department of Education in November 2011.

Prior to the November 2011 changes, a borrower was considered to have an adverse credit history if he or she had a current 90-day delinquency on any debt or certain derogatory financial events, such as bankruptcy discharge, repossession and default determination, appeared in the credit history within the five years preceding the date of the credit report.

The November 2011 changes specified that a borrower with an account in collections or charged-off with a non-zero balance was also considered to have an adverse credit history.

The new regulations set minimum thresholds on the amount of affected debt required for a borrower to have an adverse credit history. A borrower is considered to have an adverse credit history if the borrower has a current delinquency of 90 or more days on more than $2,085 in total debt or if the borrower has more than $2,085 in total debt that was in collections or charged-off in the two years preceding the date of the credit report. (The $2,085 threshold will be periodically adjusted based on CPI-U, when the inflation adjustment would result in an increase of $100 or more. Adjustments will be rounded up to the nearest multiple of $5.)

The U.S. Department of Education rejected proposals to set minimum income thresholds or maximum debt-to-income ratios, arguing that the definition of an adverse credit history is focused on whether the borrower has repaid debt in the past, not the borrower’s current or future ability to repay debt. Such proposals, according to the U.S. Department of Education, would require statutory changes.

Although the effective date for new regulations published by November 1 is normally the following July 1, the U.S. Department of Education has the authority to allow earlier implementation. The U.S. Department of Education plans to implement these changes this fall, as soon as the credit report review systems can be updated.

The U.S. Department of Education estimates that approximately 370,000 additional PLUS Loan applicants will be approved annually once these changes are implemented.

Other provisions in the new regulations include:

• Some PLUS Loan borrowers are able to obtain a PLUS Loan despite having an adverse credit history by obtaining an endorser or by demonstrating extenuating circumstances. These borrowers will now be required to receive PLUS Loan counseling offered by the U.S. Department of Education before receiving the loan.
• The credit reports used to determine whether the borrower has an adverse credit history will remain valid for 180 days, instead of 90 days. Subsequent events that typically trigger a new credit check, such as a Direct Loan Request or PLUS Loan origination record, will no longer require a new credit check if the previous credit check was conducted within the past 180 days. This should prevent most mid-year changes in eligibility for PLUS Loans.
• The U.S. Department of Education noted that it already “provides special consideration for medical debt or delinquencies relating to accidents, illness, or unemployment when determining whether an applicant has an adverse credit history.” The U.S. Department of Education stated that it may consider the type of debt when deciding whether extenuating circumstances exist in an appeal of a borrower’s adverse credit history.
• The U.S. Department of Education will begin publishing overall and institutional PLUS Loan default rates.