ED Publishes Final Rules on PLUS Loans
Update (1/21/2015): In a notice published in the Federal Register, the Department of Education announced that the early implementation date for these rules is March 29, 2015. All credit checks conducted on or after this date will use the standards explained below.
Original news item (11/2/2014): The Department of Education has issued final rules to strengthen and improve the administration of the Federal Direct PLUS Loan program, which makes loans to graduate students and parent borrowers. The primary focus was the definition of "adverse credit" and its impact on loan eligibility.
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. The department conducts credit checks to determine if applicants are eligible. The economic downturn and a stricter ED creditworthiness standard, though, resulted in an increase in the number of ineligible applicants over the past several years. As a result, a negotiated rulemaking committee was tasked earlier this year with developing proposed rules on a package of issues, including revising the definition of "adverse credit" for PLUS loans to better balance higher education access with protection from over borrowing.
Changes from Proposed Rules
Other than two minor changes, the final rules track the proposed rules ED published for comment on August 8.
Debt Threshold Indexed to Inflation
The proposed rules stated that an applicant has an adverse credit history if he or she "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." ED stated that the $2,085 threshold would be adjusted over time, likely based on the Consumer Price Index for All Urban Consumers (CPI-U) and asked for feedback on this approach.
In the final rules, ED states that it will adjust the threshold for inflation, using the CPI-U, only when doing so will result in an increase of $100 or more. The calculated CPI-U increase will be rounded to the nearest $5.
Counseling for Borrowers with Endorsers
The department received several comments on applicants receiving loan counseling before receiving a PLUS loan. Now, if an applicant with an adverse credit history becomes a qualified borrower by obtaining an endorser, the applicant must complete PLUS loan counseling offered by ED in order to receive the loan.
By law, the department is required to publish final rules in the Federal Register no later than November 1 in order for them to take effect the following July. Given the importance of access to PLUS loans, and the fact that the regulations require the department to make changes to its processes rather than schools', ED has chosen to implement these regulations as soon as possible. A separate Federal Register notice will be published when the agency is ready to do so.