A PLUS loan is a type of federal student loan available to parents of undergraduate students and to graduate or professional school students. Unlike direct student loans, aka Stafford loans, this type is not available to dependent undergraduate students. (In U.S. tax-code lingo, a dependent is a person who relies on someone else for financial support. Typically, though not always, that means a child.)
Fun fact: PLUS stands for “parent loan for undergraduate students,” but since 2006, they have been available to graduate students, as well. These loans are popular because they have lower interest rates than private student loans and you can borrow more than you can with direct student loans.
An Adverse Credit History's Effect on a PLUS Loan Application
Unlike with direct student loans, the borrower’s credit history is taken into account when the government decides whether to make a PLUS loan. So if you have problems with your credit history, you may be required to complete PLUS credit counseling at StudentLoans.gov.
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It’s important to understand that eligibility for such a loan does not hinge on your credit score, income, debt-to-income ratio, or many of the other measures used by private lenders. But you may be denied a PLUS loan if you have an “adverse credit history,” meaning:
- You are currently delinquent by 90 or more days on any debt
- You have had a bankruptcy discharge, foreclosure, repossession, tax lien, or wage garnishment within the last five years
Despite having an adverse credit history, you may still qualify for the loan by completing PLUS credit counseling. You will also need to either obtain an endorser, who agrees to repay the loan if you can’t, or document extenuating circumstances.
PLUS Credit Counseling and Your Budget
PLUS credit counseling at StudentLoans.gov starts with a quick credit check, which tells you if you have any declined loans on file. After that, you’ll see your current loans listed. Then you’re asked to estimate both the cost of school attendance and your income resources (you can use national averages if you’re not sure). This data allows the widget to project how much you’ll need to borrow.
Next, you’re asked to enter your annual income (the widget will estimate federal withholding and calculate your monthly income for you) and your budget. In the screen shot below, I used some sample numbers to estimate a monthly income and budget. The budget is pretty thoughtful: Under “More Expenses,” it includes suggestions for retirement and emergency savings (but unfortunately not for child care).
Like other counseling programs on StudentLoans.gov, this one runs your personal numbers and determines your probable student loan payment. Using my sample numbers, the program suggested that my student loan debt burden would be low. That’s where you want to be!
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PLUS credit counseling is for people who already have at least one major strike against them on their credit. So it makes sense that a huge part of the program is called “Avoiding Default.” If the government is going to give you a loan, it wants to make sure you know how to repay it and what the consequences might be if you don’t.
Ideally, PLUS credit counseling directs borrowers to graduate (to increase earnings potential), make payments on time, and open mail from student loan servicers to make sure you know what they need to do and when. Good advice!
If you’re having trouble, PLUS credit counseling suggests several steps to take:
- Deferment, if you meet the criteria (including you’re enrolled in school, unemployed, performing military or National Guard service, experiencing economic hardship, or, if you have a temporary disability, completing a rehab program)
- Forbearance, if you don’t meet the criteria for deferment
- Forgiveness, under certain federal programs for public service or teaching employment
- Cancellation or discharge (in case of school closure, identity theft, disability, or death)
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Consequences of Delinquency and Default
PLUS credit counseling is clear about the consequences of delinquency and default.
Delinquency means that you have missed a payment, even by one day. That’s certainly not great, but it’s much better than a student loan default, which is what you’ll find yourself in if you’re delinquent for more than 270 days.
The consequences of delinquency are somewhat less serious than those of default. But PLUS credit counseling points out that in either case, you could:
- Be required to repay the entire balance of your loan (pretty rough when the whole problem is that you couldn’t pay in the first place!)
- Be denied other loans by either the federal government or a private lender
- Become ineligible for forbearance, deferment, and so on
- Have your wages garnished and/or your tax refund withheld
- Have trouble getting an apartment or getting utilities hooked up (because of the impact to your credit history)
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All this is pretty scary stuff. PLUS credit counseling is there to make sure you know what you’re getting into. And because these consequences are so serious, it also reminds you to keep accurate records of all your student loan-related transactions and gives you directions on how to resolve any dispute you have with your student loan servicer.
Final Thoughts on the PLUS Loan Application and Credit Counseling
If you have an adverse credit history, you’ll have trouble getting a PLUS loan. But completing PLUS credit counseling is a step you can take to ultimately access this federal student loan source.
It might be a little scary to educate yourself on the consequences of default. Still, it’s a lot better than not knowing. And in the process, you’ll also learn about tools that can help you avoid defaulting in the first place.
Since credit is so important to the PLUS loan application process, make sure that you know what your credit score is before you apply. There are generally two ways to go about getting this information:
You can get your score for free from someplace like Credit Sesame. This will generally give you a snapshot of where your report stands. It gives a preliminary assessment of your credit. But depending on the situation, your actual credit score can deviate 50 points or more due to minor information that the snapshots don't capture.
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Paid credit reports, like those from TransUnion, are the bureau reports. As such, they contain more accurate information, and should almost always be in line with what your lenders see.
Since there's a lot at stake with your credit counseling, and the process can take a few weeks to a few months, it may be worth the investment of $10 to $30 a month to be on top of any negative changes that could impact your application.
This is the third installment in a four-part series on financial aid. It will publish each Friday through August 3, 2018. The previous pieces in this series are:
- “The Lowdown on Federal Student Loan Entrance Counseling”
- “How Does the TEACH Grant Work? Watch Out for Requirements!”