Parents looking to help their student pay for college can borrow Parent PLUS loans from the federal government. Qualifying for these loans is easier than qualifying for private loans. However, you can be denied a Parent PLUS loan if a credit check identifies certain red flags.
There are several steps you can take if you’re denied a Parent PLUS loan.
[Read: Best Parent Student Loans: Parent PLUS and Private.]
Why You Might Be Denied a Parent PLUS Loan
While they’ve been available since 1980, Parent PLUS loans only account for between 7% and 8% of all federal student debt. Around 550,000 parents take out PLUS loans in a typical year.
Parents often take out these loans to fill funding gaps after their student hits the undergraduate borrowing limit, which is $5,500 to $7,500 annually, depending on the student’s year in school. For years, parents could borrow up to the cost of attendance, but new caps now limit them to $20,000 per year and $65,000 lifetime per student. The limits are part of a larger federal student loan overhaul.
PLUS loans have higher interest rates than loans taken out directly by an undergraduate student. This year’s student loan interest rate is 9.07% for parent loans and 6.52% for undergraduates.
As with other direct student loans, the government doesn’t take credit score or income into account when determining whether parents qualify for a PLUS loan. But it does check to make sure parents don’t have an adverse credit history.
An applicant can be denied a PLUS loan for recent bankruptcies, debts of at least $2,085 that are more than 90 days delinquent, a recent wage garnishment, tax lien or foreclosure.
“All of those things would typically lower a credit score anyway, but the credit score itself is not a factor,” says Jack Wang, a college financial aid advisor at Innovative Advisory Group and the host of the “Smart College Buyer” podcast.
Parent PLUS Loan Denied? Here’s What You Can Do
If your Parent PLUS loan application is rejected, you have options to appeal or access additional financing in other ways.
Contact the College
Your student’s college can usually walk you through your options if your Parent PLUS loan is denied, so parents should reach out to representatives there as soon as possible, says Tom O’Hare, holistic college advisor at Get College Going.
“I always suggest consulting with the financial aid or student financial services office on campus to see how they can assist,” he says. “The office manages the program at the local campus level.”
The college may be able to review your situation and advise you as to which of the following options you might want to pursue first.
Increase Your Student’s Loan Amount
When a parent’s PLUS loan is denied, the student becomes eligible for the higher loan limits that are generally only available to independent undergraduate students. The annual limit varies by year in school but is between $4,000 and $5,000 more than the amount that can be borrowed by dependent students.
“For example, (in) freshman year, instead of being able to borrow $5,500, the student would be able to borrow $9,500,” says Wang.
Students in this situation will also see their aggregate borrowing limit jump from $31,000 to $57,500.
If one parent is denied a PLUS loan, the student gains access to additional borrowing even if they have another parent who hasn’t applied for PLUS loans. However, if two parents each apply for PLUS loans and one qualifies, the student won’t be eligible for higher limits.
[Read: Best Student Loans for Bad Credit. ]
Appeal the Decision
If you believe your Parent PLUS denial was the result of an error or due to outdated credit information, you can appeal to the Education Department to potentially get the ruling overturned.
You can appeal online, and you’ll need to provide documentation supporting your case. You’ll also need to complete a credit counseling educational program.
Wang says he doesn’t know what percentage of appeals succeed, but cases with stronger supporting documents typically have a better chance.
“What I can say is that if a family has a legitimate, documented situation or proof showing that they paid a loan off, for example, they tend to be a little bit more successful,” he says.
Get an Endorser and Reapply
Parents can add an “endorser” to their PLUS loan application to improve their approval odds.
This cosigner shares full responsibility for the debt, which appears on their credit report. While helpful for securing funding, it is a serious financial commitment for the endorser and should be approached with caution.
Find a Cosigner and Apply for Private Loans
Another option is to find a cosigner to help your student take out a private student loan.
In this case, the debt would be the responsibility of the student and the cosigner, leaving the parent out of the loan. This might be a better option for a parent who is already struggling to manage a lot of debt. Be sure to compare interest rates and terms to determine the best option.
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What to Do When a Parent Is Denied a PLUS Loan originally appeared on usnews.com
