How to Qualify for a PLUS Loan Despite an Adverse Credit History

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? — A.P.

There are two separate issues. One relates to eligibility for federal student aid in general. The other relates specifically to eligibility 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 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 rehabilitates 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 1-800-557-7394.

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.

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