Options for a Family Denied Education Loans Due to Insufficient Income

Mark Kantrowitz

October 04, 2010

A denial based on income indicates that you applied for a private student loan, not a federal education loan. As noted earlier, you should always borrow federal first. After a student exhausts his or her Stafford loan eligibility, the student’s parents should consider borrowing from the Parent PLUS loan program. Since the Parent PLUS loan limits are up to the full cost of attendance minus other aid, there should be no need for a dependent student to borrow from a private student loan program except in a variety of unusual circumstances. After all, if the parents are denied a PLUS loan, they are unlikely to satisfy the stricter requirements to cosign a private student loan, so the student will probably not get a private student loan because most dependent students need a cosigner to qualify for a private student loan.

The most common exceptional situation occurs when the student is not eligible for federal student aid. This can occur because of the student’s failure to make satisfactory academic progress, because the student or the parents are not US citizens or permanent residents, or because the parents refuse to file the FAFSA because of a messy divorce or unfiled federal income tax returns. Medical and law students often borrow private student loans to cover their costs while studying for the medical boards and the bar because federal student loans are not available for state licensing exams other than for teaching. Only parents are eligible to borrow from the Parent PLUS loan, so if the student is being raised by a grandparent, aunt or uncle, or older sibling, the non-parent family member can cosign a private student loan but can’t borrow from the PLUS loan program. Stepparents can borrow from the Parent PLUS loan program, but only for as long as they are married to the student’s custodial parent. Parents of independent students are not eligible to borrow from the Parent PLUS loan program, so if the student has exhausted the Stafford loan limits, they may have no option other than private student loans.

Some parents are unwilling to borrow from the Parent PLUS loan program because the student is not obligated to repay the loan and because the parents are already up to their eyebrows in debt. But a cosigner on a private student loan is a coborrower. If the student is delinquent in repaying the loan or defaults on the loan, it is reported on the cosigner’s credit history too. Often the lenders will start seeking repayment from the cosigner after the first late payment.

Needing to borrow from a private student loan program is often a sign of overborrowing. Total education debt should be limited to no more than the student’s expected starting salary after graduation. Borrowing more than $10,000 per year in school is also a sign of overborrowing.

Students who attend private colleges are more likely to borrow than students who attend public colleges, and the average debt is higher. For example, 96.0% of Bachelor’s degree recipients at for-profit colleges and 70.5% of Bachelor’s degree recipients at non-profit colleges graduated with student loan debt, compared with 61.2% of Bachelor’s degree recipients at public colleges. The average debt at graduation was $32,909 for for-profit colleges, $27,535 for non-profit colleges and $20,040 for public colleges. Private college graduates were also more likely to borrow from non-federal student loan programs, with 64.6% of Bachelor’s degree recipients at for-profit colleges and 41.1% of Bachelor’s degree recipients at non-profit colleges borrowing private student loans compared with 27.6% of Bachelor’s degree recipients at public colleges. (These figures were calculated using the data analysis system for the 2007-08 National Postsecondary Student Aid Study, which surveyed 140,000 undergraduate students on how they paid for college.)

So by switching from a private college to a state college, your daughter is less likely to need a private student loan. If you need to borrow to pay for her education at the state school, you should ask the college’s financial aid office about federal education loans, as you are more likely to qualify for federal loans and the federal loans will save you money.

Given your income situation, you should also ask the college’s financial aid administrator for a professional judgment review, sometimes called a financial aid appeal. The decrease in your income might qualify your daughter for more student financial aid, including grants.

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