Does a Parent's Credit History Affect the Student's Eligibility for Loans and Other Aid?
July 11, 2011
My parents have a Federal Direct PLUS Loan they got while I was an undergraduate student several years ago. Due to their current financial hardship, they haven’t been keeping up with the payments. I also had some college loans which I am paying regularly without problems. I would like to know if my parents’ financial situation will impact my credit, since they were able to get the loan because I was a student. The loan was made in my mother’s name but the lender has all my information. Is this going to affect my credit while it is affecting their credit? Also, I want to know if this will impact my future student loan or financial aid eligibility. I’m starting graduate school in September. I have received a student loan offer from the school, but I have not yet completed the paperwork because I’m worried that my credit may be affected by my parents’ financial difficulties. — E.H.
A Federal Parent PLUS loan is a parent loan. Only the parent is obligated to repay this loan, even though the money was borrowed to pay for the educational expenses of a dependent child. A student cannot cosign his or her parent’s Parent PLUS loan. If a parent borrower is delinquent in repaying the Parent PLUS loan or defaults on the Parent PLUS loan, it affects only the parent’s credit history. The student’s credit history is not affected. A default on a Parent PLUS loan will preclude the parent from obtaining additional Parent PLUS loans, but it does not otherwise affect the student’s eligibility for student loans or other forms of financial aid.
Note also that a graduate student is considered to be an independent student. Parent information is not required on a graduate student’s Free Application for Federal Student Aid (FAFSA). The Parent PLUS loan is not available to parents of graduate students. Instead, the graduate student may borrow from the Federal Grad PLUS loan program on his or her own, in addition to the Federal Stafford loan. So long as you personally do not have an adverse credit history, you should be able to qualify for the Grad PLUS loan. (The Stafford loan is a student loan and does not depend on the student’s credit history at all. Graduate students are required to exhaust eligibility for the Stafford loan before relying on the Grad PLUS loan.)
Contrast the Federal Parent PLUS loan with a private student loan, which is typically borrowed by the student with a parent as cosigner. Both the student and cosigner are obligated to repay the debt. Even if the student and cosigner have a side agreement for one of them to make the payments on the loan, a failure to repay the loan will be reported on the credit history of both the borrower and cosigner. A cosigner is effectively a co-borrower, equally obligated to repay the loan. If you signed the promissory note, you are responsible to repay the debt, regardless of whether the other borrowers said that they would make the payments. If they fail to make the payments on the private student loan, it will ruin both their credit and yours.
(Some private student loans offer a cosigner release option after the primary borrower makes 24, 36 or 48 initial consecutive on-time full monthly payments, subject to credit criteria. In practice, it can be difficult to obtain a cosigner release. One can achieve the same effect by refinancing the cosigned loan into a loan with just one borrower.)
Your parents should contact the Direct Loan Servicing Center to ask about options for avoiding default on their Parent PLUS loan. After 360 days of non-payment, their Parent PLUS loan will be in default.
Defaulting on a Parent PLUS loan will increase their costs, since interest continues to accrue after default and up to 20% of each payment on a defaulted loan will be deducted for collection costs. The government can garnish up to 15% of wages of a defaulted borrower and intercept federal income tax refunds without a court order. The obligation to repay the defaulted loan will not end when they retire. The federal government can garnish up to 15% of Social Security benefit payments. There is no statute of limitations on this debt.
One option for avoiding default includes a temporary suspension of repayment obligations through a deferment or forbearance. After they default, your parents will no longer be eligible for a deferment or a forbearance, so it is best if they talk to the lender before they default. Another option for avoiding default includes alternate repayment plans that reduce the monthly payment by stretching out the repayment term, such as extended repayment. Unfortunately, the income-contingent and income-based repayment plans are not available to Parent PLUS loan borrowers.