I'm currently an MBA student who has a VERY adverse credit
history. Part of which includes a defaulted Federal Loan. I'm halfway
through my first year of business school and find myself needing more
money. I've found someone who does not have an adverse credit history
who is willing to cosign. I'm worried that I still won't receive the
loan. What are the chances that I will be approved for the Grad
PLUS Loan with the cosigner? If not, are you aware of any other
avenues for someone who is in my position?
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There are two separate issues. One relates to eligibility for federal
student aid in general. The other relates specifically to eligibility
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for federal student loans.
Per the regulations at 34 CFR 668.32(g)(1), a student who is in
default on a federal student loan — such as a Federal Perkins,
Federal Stafford or Federal PLUS loan — is ineligible for any
federal student aid. (A Federal Parent PLUS loan borrower must
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likewise not be in default on a federal education loan.)
However, a borrower who is in default on a federal education loan may
nevertheless qualify for federal student aid if the borrower
the defaulted loan or repays the loan in full, per the regulations at
34 CFR 668.35. To rehabilitate a defaulted federal education loan, the
borrower must make six consecutive on-time full voluntary monthly payments
under an arrangement that is satisfactory to the holder of the
loan. These payments cannot include involuntary payments made through
wage garnishment or the offset of federal and state income tax
refunds. (The payments, however, must also be "reasonable and
affordable.") To be considered on-time, the payment must be received within
15 days of the due date. Rehabilitation is a one-time opportunity to
regain eligibility for federal student aid.
To be eligible for the Federal PLUS loan, the borrower must not have an
adverse credit history. An adverse credit history is defined in the
regulations at 34 CFR 685.200(c)(1)(vii)(B) as including a
current delinquency of 90 or more days on any debt or having had
certain derogatory events within the last five years. These derogatory
events include bankruptcy discharge, foreclosure, repossession, tax
lien, wage garnishment or default determination. It also includes the
write-off of federal education loan debt.
Borrowers who are rehabilitating a defaulted federal education loan
can clear the default from their credit history by making 9 out of 10
consecutive, voluntary, on-time, reasonable and affordable monthly
payments under an arrangement satisfactory to the loan holder. To be
considered on-time, the payment must be received within 20 days of the
due date for Federal Stafford and Federal PLUS loans and within 15
days of the due date for Federal Perkins loans.
A borrower who has an adverse credit history may nevertheless still
qualify for a Federal PLUS loan by documenting to the satisfaction of
the US Department of Education that extenuating circumstances exist.
Extenuating circumstances can include evidence that the debt was
included in a Chapter 13 bankruptcy (as opposed to a Chapter 7, 11 or
12 bankruptcy), a divorce decree showing that the borrower is not
responsible for repayment of the debt, proof that a defaulted federal
education loan was repaid through consolidation and the consolidation
loan is not delinquent, documentation that the wage garnishment has
been released, documentation that a short sale has been approved and
completed, documentation that the mortgage has been paid in full,
documentation of an executed loan modification agreement, or
documentation that the derogatory event occured more than five years
ago, among other circumstances.
To ask for a review based on extenuating circumstances, select
"Document Extenuating Circumstances" on the left-side navigation after
logging in to StudentLoans.gov or call Applicant Services at
Borrowers can also qualify for a Federal PLUS loan despite an adverse
credit history by presenting the US Department of Education with
evidence that demonstrates that the credit report information that
caused the borrower to have an adverse credit history is incorrect.
Finally, borrowers can qualify for a Federal PLUS loan despite an
adverse credit history by obtaining an endorser (cosigner) who does
not have an adverse credit history. The extenuating circumstances
exceptions do not apply to the endorser.
So long as the student is not in default on a federal student loan and
the cosigner does not have an adverse credit history, the student
should qualify for the Federal Grad PLUS loan. But if the student is
in default on a federal student loan, the student will not qualify for
a Federal Grad PLUS loan even with a creditworthy cosigner.
A student who is denied a Federal Grad PLUS loan because of an adverse
credit history is unlikely to qualify for a private student
loan. However, the student might qualify for the private student loan
with a creditworthy cosigner.