Parent Plus Loan Program: Too much of a good thing?

October 19th, 2010 by Ken 5 Comments »

The Parent Plus loan has long been a popular choice for parents that want to help pay for their child’s college education. The fixed interest rate and repayment options in the Plus loan offer parents a viable financing option. However some parents might be getting in over their head.

Recent articles from Next Student Loan Blog and U.S. News and World Reports review statistics released in a report by Mark Kantrowitz, publisher of Finaid.org.

The report compares the 2007-2008 plus loan approval rates for the Direct Loan Program and the Federal Family Education Loan Program (FFELP). At that time the Plus loan denial rates were 42% in FFELP and 21% in Direct Loans. This is a drastic difference in denial rates.

As mentioned in an earlier blog post , the Direct Loan program took over all FFELP loan processing as of July 1, 2010. This trend for approvals in Parent Plus loans will most likely continue under the Direct Loan program.

The reason why The Direct Loans Program approves at a high rate is because of the way they observe the credit check criteria. The Plus Loan approval criteria under Direct Loans looks for any delinquent accounts only within the past ninety days of the credit report. Under FFELP, loan processors could deny a Parent Plus Loan if there were any 90 day bill delinquencies in the past 5 years. FFELP used a more stringent credit criteria and denied many more borrowers than Direct Loans.

This has a big impact on Stafford Loan eligibility. As mentioned in an earlier blog post, when a parent is credit denied for a plus loan the student becomes eligible for an additional $4,000 Unsubsidized Stafford Loan if they are a Freshman or Sophomore and $5,000 if they are a Junior or Senior.

Over the years, many parents with outstanding credit issues would routinely apply for Parent Plus loans with the intention of getting denied. This would allow the student to qualify for the extra stafford loan.

Parents that were anticipating a denial may now be approved for Parent Plus loans even if they are on the verge of bankruptcy or unemployed.

Parents must now carefully consider their ability to repay. Plus loans, like all student loans are not dischargeable in bankruptcy except in extreme circumstances. They begin repayment while the student is in school.

If a parent is unexpectedly approved for a Parent Plus loan and do not want it they can cancel the request altogether, but the student will not be able to access an additional unsubsidized stafford loan.

When a parent is permanently disabled or otherwise unable to earn income to repay a Plus loan, but is approved regardless, they should submit a written appeal to the school’s financial aid office explaining so. After review, the financial aid office can intervene with the Direct Loan program by overriding the Plus loan approval. Proof of disability and proper documentation will be required.

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