How to appeal credit score
Editor's Note: The CollegeUp.org Blog is updating our popular Parent PLUS FAQs to make sure parents and students have the details they need for the 2015-16 financial aid award year. Click here to read our latest set of FAQs on the Parent PLUS loan credit check process.
In an ongoing series, the CollegeUp.org Blog is answering frequently asked questions about Parent PLUS loans. Our second installment covers Questions 12 through 19, which focus on Parent PLUS loan credit criteria.
12. What are the credit criteria for a Parent PLUS loan?
A borrower must not have an “adverse” credit history. According to the U.S. Department of Education, which administers the Parent PLUS loan program, you have an adverse credit history if your credit report shows any of the following:
- A credit account for which payment is 90 or more days past due at the time the credit report is “pulled.” Credit accounts include mortgages and other home loans, car loans, credit card accounts, and unpaid medical bills.
- A charge-off or write-off of any credit account with a balance greater than zero at any time during the five years preceding the date of the credit report. This criterion was added in late 2011, and, since then, Federal Parent PLUS loan approval rates have declined somewhat.
- A credit account – open or closed – showing an unpaid collection with a balance greater than zero, at any time during the five years preceding the date of the credit report. Collection accounts are more than 90 days past due.
- At any time during the five years preceding the date of the credit report: a tax lien, wage garnishment, mortgage or other loan foreclosure, repossession, or discharge of a loan due to a bankruptcy filed under Chapter 7, 11, or 12.
- A default on a federal student loan.
Note that the lack of a credit history is not considered to be an adverse credit history.
13. Doesn’t the PLUS loan credit check examine the borrower’s credit score or debt-to-income ratio?
No. When determining your eligibility for a Parent PLUS loan, the federal government looks to see if you have an adverse credit history – something on your credit report that indicates you have not met your debt obligations in the past. (See the list provided in the answer to Question 12.) The credit report requested by the government never includes your credit score – for example, your FICO score. And, the government does not ask for income information. The government does not calculate what percentage of your income is currently allocated to your monthly debt payments.
A borrower’s debt-to-income ratio typically is used by private lenders to determine if loan applicants earn enough income to cover all of their monthly loan payments, including the payment on the prospective debt, and still have enough to cover the cost of food, shelter, transportation, and other expenses. Even though the federal government doesn’t look at your debt-to-income ratio, you should examine your ability to make your Parent PLUS payments.
Traditionally, lenders have cautioned that borrowers whose monthly loan, credit card and other debt payments consume more than 36 percent of their pre-tax monthly incomes are more likely to have trouble making all of their debt payments on time and thus are not considered to be good credit risks. If your loan payments are consuming a large chunk of your income or you’re struggling to cover any of your monthly bills, you should think twice about taking on a PLUS loan. Defaulting on a federal student loan levies a heavy toll, including a ruined credit rating and collection costs.
14. Does the adverse credit history check look at the credit history of the student beneficiary of the Parent PLUS loan?
15. What if I apply for a Parent PLUS loan but don’t pass the credit check?
You have several possible options to pursue, but first find out why you were denied a Parent PLUS loan. The government’s notification of denial will include the name and contact information of the credit agency that supplied the credit history report on which the denial was based. You can call and ask for a free copy of your credit report (and asking for a report in this situation won’t hurt your credit score).
Check to see if there is any incorrect information.
For example, your history may incorrectly show that a credit account is 90 or more days past due – perhaps because a lender has not properly recorded your payments. This is a rare event, but it can happen.
You also should look for any problems that may be considered “extenuating circumstances.” For example, denied Parent PLUS loan applicants may discover a charge-off of an old medical bill that went unpaid due to confusion about insurance coverage. Or perhaps a credit report doesn’t reflect the outcome of a final divorce decree, which placed responsibility for repaying a debt on the applicant’s “ex.”
16. So, just what are those options?
- If your credit report has wrong information, you can file an appeal with the Department of Education. You’ll need to provide the necessary documentation, which also means taking the steps to get the errant information corrected. And that means contacting the creditor and/or the credit bureau. Yes, these efforts may take time, but you always should act swiftly to correct a mistake in your credit report.
- If you have extenuating circumstances, you can file an appeal, explaining the issue. For example, if your credit report shows that you’re 90 days or more overdue on a debt that has been assigned to your ex-spouse by a divorce decree, you can file an appeal that documents the outcome of your divorce. Click here for more information on appealing a PLUS loan denial due to extenuating circumstances.
- If your credit report is accurate, see if you can correct the situation. For example, you may have a little-used credit card that you somehow neglected to pay, and it’s now 90 days or more past-due. Pay the debt in full and provide the necessary documentation in your appeal.
- If your credit is in bad shape, you still can get a Parent PLUS loan if you add an endorser (co-signer) who can pass the test for adverse credit.
- If you don’t have access to an eligible endorser and can’t “fix” your credit history problem, your child may be eligible to receive an additional $4,000 in unsubsidized Stafford loan money for his/her freshman or sophomore year ($5,000 in later years). In this situation, the next step is for your student to contact the school's financial aid office.
17. How do I initiate an appeal of a Parent PLUS loan credit denial?
According to a Department of Education website. if your credit report has incorrect information or you believe you qualify for a review based on extenuating circumstances, you have two options for requesting a review of your credit denial:
Log in to StudentLoans.gov and then select "Document Extenuating Circumstances" (located on the left navigation bar). Just follow the directions; the Applicant Services department will contact you with further instructions.
- Contact Applicant Services between 8:00 AM to 8:00 PM, Eastern Time, Monday through Friday. The toll-free number is 1-800-557-7394.
18. Who can endorse a Parent PLUS loan? Basically, any adult who is a U.S. citizen or eligible non-citizen and who can pass the credit history review, may endorse a Parent PLUS loan. (Please note that an endorser cannot appeal a denial due to extenuating circumstances.) The endorser often is a sibling, parent, another relative, or a close friend. Endorsing a Parent PLUS loan creates a potential financial obligation because, by signing the PLUS loan promissory note, the endorser agrees to repay the loan if the parent borrower fails to make the necessary payments.
19. Can my child be the endorser on my Parent PLUS loan? No, not if that child is the student beneficiary of the loan. Another child – perhaps an older sibling who has no credit problems – could serve as the endorser. But, again, keep in mind the responsibilities taken on by co-signing a debt. If you need an endorser, enlist someone who is truly able and willing to pay up, if needed.
Our Parent PLUS loan FAQ series will continue next week. Our first installment covered PLUS loan basics. In our third installment. we answer frequently asked, nitty-gritty questions about the rules that govern which parent can apply for a Parent PLUS loan.
Patricia Scherschel is Senior Program Manager, National Engagement and Philanthropy at USA Funds.
This post was last updated on August 4, 2015.Source: blog.collegeup.org