On August 8, the Department of Education published a notice of proposed rulemaking (NPRM) in the Federal Register to revise its rules on credit determinations for all PLUS loans made to graduate student and parent borrowers. Over the last few years as ED became stricter in enforcing its rules on creditworthiness of PLUS loan borrowers, coupled with the lingering effects of the economic downturn, loan disapprovals rose sharply. The impact was felt particularly hard at some small institutions serving underrepresented populations, including a number of historically black colleges and universities.
Earlier this year, a panel of stakeholders reached agreement on draft proposals for revising ED's definition of "adverse credit" for PLUS loans, even though they failed to come to consensus on the entire package of issues placed before them. Under the protocols for the negotiated rulemaking process, ED is not bound to follow draft language developed in negotiations unless consensus is reached on the entire regulatory package. In this case, however, ED has stuck with the compromise language on the PLUS loan issue.
The Higher Education Act states that in order to be eligible to receive a PLUS loan, an applicant must not have an adverse credit history. ED conducts credit checks on all loan applicants to make sure they meet this requirement.
Adverse Credit History
The NPRM tempers current practice by proposing that a PLUS applicant would have an adverse credit history "if the applicant has one or more debts with a total combined outstanding balance greater than $2,085 that are 90 or more days delinquent as of the date of the credit report, or that have been placed in collection or charged off during the two years preceding the date of the credit report." The $2,085 threshold can be adjusted over time by ED, likely by the agency tying it to the Consumer Price Index for All Urban Consumers (CPI-U). ED asks stakeholders to share in their comments which index they feel would be most appropriate. Any future adjustment that ED would make to the $2,085 threshold would be announced in the Federal Register.
The existing provision stating that an applicant has an adverse credit history if the applicant has been the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a debt under Title IV during the five years preceding the date of the credit report would remain in effect.
While the terms "charged off" and "in collection" are common in the collection industry, they are not defined in ED's existing regulations. As a result, ED has added the two definitions to the NPRM: "Charged off" means "a debt that a creditor has written off as a loss, but that is still subject to collection action." "In collection" indicates "a debt that has been placed with a collection agency by a creditor or that is subject to more intensive efforts by a creditor to recover amounts owed from a borrower who has not responded satisfactorily to the demands routinely made as part of the creditor's billing procedures."
Under current regulations, a parent who has an adverse credit history can be eligible for a PLUS loan if he or she submits documentation to ED explaining that extenuating circumstances exist. That documentation may include, but is not limited to, an updated credit report for the parent or "a statement from the creditor that the parent has repaid or made satisfactory arrangements to repay a debt that was considered in determining that the parent has an adverse credit history."
Under the NPRM, in addition to providing such documentation, a parent or student with an adverse credit history would be required to complete PLUS loan counseling offered by ED in order to become eligible for a PLUS loan.
Comments Due September 8
By law, the department is required to publish final rules in the Federal Register no later than November 1 in order for them take effect the following July. Because of that requirement, ED is accepting comments for only 30 days, with a deadline of September 8.