Adverse Credit History
A credit history is a record of a person’s past borrowing and repaying behavior, including delinquencies, defaults and on-time payments.
A credit report is a description of a person’s credit history. Free credit reports may be obtained once a year from the three major credit reporting agencies at www.annualcreditreport.com.
A credit score is a numeric summary of a person’s credit history. It corresponds to the likelihood that the borrower will repay his/her debts on-time, as per the agreement.
Borrowers of Federal Grad PLUS Loans and Federal Parent PLUS Loans must not have an adverse credit history. An adverse credit history occurs when
- the borrower has a current delinquency of 90 or more days on more than $2,085 in total debt,
- the borrower has more than $2,085 in total debt in collections or charged-off during the two years preceding the date of the credit report or
- the borrower’s credit report has a derogatory event within the five years preceding the date of the credit report.
Derogatory events include:
- Default determination
- Bankruptcy discharge
- Foreclosure (including a deed in lieu of foreclosure)
- Repossession (including voluntary surrender to avoid repossession)
- Tax lien (including county, state and federal tax liens)
- Wage garnishment
- Charge-off or write-off of a Title IV Federal debt (including a debt from a federal grant overpayment, not just federal student loans and federal parent loans)
These derogatory events are defined in the federal regulations.
The $2,085 threshold is adjusted periodically for inflation based on the Consumer Price Index (CPI-U) when the cumulative inflationary adjustment would result in an increase of $100 or more. Adjustments will be rounded up to the nearest multiple of $5.
The absence of a credit history is not considered to be an adverse credit history.
An adverse credit history does not depend on other measures commonly used by lenders for private student loans, auto loans or mortgages, such as credit scores, minimum income thresholds, debt-to-income ratios or debt-service-to-income ratios.
Adverse Credit History Workarounds
There are several options that a borrower who has an adverse credit history may use to qualify for a Federal Grad PLUS loan or Federal Parent PLUS loan.
- The borrower could cure a 90-day delinquency by bringing the delinquent account current and then reapply for the Federal Grad PLUS loan or Federal Parent PLUS loan after the borrower’s credit report has been updated.
- The borrower could get an endorser who does not have an adverse credit history to cosign the loan, thereby agreeing to repay the loan if the borrower defaults.
- The borrower could document that the credit information that was the basis for the adverse credit history determination is incorrect.
- The borrower could appeal the denial by documenting, to the satisfaction of the U.S. Department of Education, that certain extenuating circumstances resulted in the borrower’s adverse credit history.
Note that the student cannot be the endorser on a Federal Parent PLUS loan. Note also that the extenuating circumstances exception applies only to the borrower, not the endorser. The endorser cannot have an adverse credit history.
Extenuating circumstances include the following:
- The borrower was not responsible for repaying the debt.
- The borrower was an authorized user of the account, but not the primary borrower.
- The borrower is divorced and the divorce decree shows that the borrower’s spouse and not the borrower is responsible for repaying the debt.
- Satisfactory repayment in progress or completed.
- The account or debt has been paid in full.
- Satisfactory payment arrangements have been made on the debt and the borrower has made at least six consecutive, voluntary, on-time full monthly payments under the payment arrangements.
- The debt was included in a debt consolidation and the borrower has made at least six consecutive, voluntary, on-time full monthly payments under the payment arrangements.
- The debt was included in a Chapter 13 bankruptcy, as opposed to a Chapter 7, 11 or 12 bankruptcy, or was converted to a Chapter 13 bankruptcy.
- The default should have been removed from the borrower’s credit history.
- The federal student loan was consolidated and the consolidation loan is not delinquent.
- The borrower has rehabilitated the defaulted federal student loan, so it is no longer in default.
- The cause of the adverse credit history has been reversed or released.
- The wage garnishment has been released.
- The repossession has been reversed and the auto loan reinstated.
- The foreclosure process was ended.
- A loan modification agreement has been signed, ending the foreclosure process, and the borrower has been repaying the mortgage in accordance with the loan modification agreement.
- A short sale has been approved and completed, ending the foreclosure process.
- Timing issues in the credit report.
- Proof that the foreclosure, short sale, deed in lieu of foreclosure or bankruptcy discharge occurred more than five years ago.
- Errors in the credit report.
- Proof that the tax lien was filed incorrectly and has been released.
Borrowers who have extenuating circumstances should call 1-800-557-7394 or select “Document Extenuating Circumstances” after logging in to StudentLoans.gov.