When Can a Student's Grandparents Substitute for the Parents on Financial Aid Forms?
August 08, 2011
Due to a layoff and subsequent underemployment, our current credit profile includes an account that is more than 90 days delinquent. We are currently working with the lender on a loan modification. What options are available for the student’s grandparents to substitute for the parents for signing or co-signing for financial aid? — S.R.
An undergraduate student’s parents will be ineligible for the Parent PLUS loan if they have an adverse credit history. An adverse credit history includes a current delinquency of 90 or more days on any debt or a 5-year look-back for derogatory elements of the credit history, such as bankruptcy or foreclosure. An adverse credit history does not otherwise affect eligibility for federal student aid.
If the student’s parents have been denied a Parent PLUS loan, the student will become eligible for the same unsubsidized Stafford loan limits available to independent students. These loan limits are $4,000 per year higher than the normal limits for dependent students during the freshman and sophomore years and $5,000 per year higher during the junior and senior years.
Alternately, there are two main methods for regaining eligibility for the Parent PLUS loan. If the only reason the parents are ineligible is due to a 90-day delinquency, the parents can regain eligibility by bringing the delinquent account current. They can also regain eligibility by getting a creditworthy endorser to cosign the loans. This cosigner cannot be the student, but it can be the student’s grandparents.
(Grandparents are not considered to be parents for federal student aid purposes unless they have adopted the student. Thus, while the grandparents can cosign the parent’s Parent PLUS loan, they cannot borrow from the Parent PLUS loan program on their own.)
Similarly, grandparents can cosign a private student loan, provided that they satisfy the credit underwriting criteria. Note that lenders of private student loans are increasingly considering debt-to-income ratios when evaluating creditworthiness of a cosigner. If the grandparents are retired, on limited income and do not have financial resources sufficient to repay the debt, they might not qualify as creditworthy cosigners on the private student loan.
Note that a cosigner is a co-borrower, equally obligated to repay the debt. If the student is delinquent or defaults, it will show up on the cosigner’s credit history in addition to the student’s credit history, ruining the credit scores of both borrowers.
Some lenders are now offering private education loans that can be borrowed by a parent or grandparent without involving the student as a borrower. The parent or grandparent is solely responsible for repaying the loan. Eligibility is based on the borrower’s credit history and other criteria.
See also FinAid’s Tips for Grandparents on Helping Grandchildren Pay for College.