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Why the feds might deny a parent loan for college tuition

Exactly why would a parent be turned down for a federal education loan?

A story in Sunday’s Washington Post explores how a tightening of federal lending standards in October 2011 led to a reduction in loans to parents of college students that had a significant effect on historically black colleges and universities.

The underwriting shift, as the story noted, produced a tighter screening process for loan applications to ensure that certain kinds of unpaid debts were considered in a review of a parent’s credit record. This made it more likely that some applicants would be deemed to have an “adverse credit history” and therefore would be ineligible for the loans.

A reader this morning emailed The Post to ask for more detail.

Here is what the Education Department said about the screening criteria shift:

Before the shift, the department said, these items in a parent’s credit record could lead to a loan application rejection: bankruptcy discharge within the past five years (Chapter 7, 11 or 12); repossession within the past five years; foreclosure proceedings started, and foreclosure within the past five years; accounts presently 90 or more days delinquent; wage garnishment within the past five years; defaulted student loan within the past five years; lease or contract terminated by default; government claim on secured real estate within the past five years; county/state/federal tax lien within the past five years.

Those items are all still red flags.

In October 2011, the department added these two screening criteria: unpaid charge-off accounts within the past five years with a dollar balance greater than zero; and unpaid collection accounts within the past five years with a dollar balance greater than zero.

A department Web site also notes that a parent with an adverse credit history can get a federal loan by obtaining a co-signer who does not have an adverse credit history, or by documenting “to the U.S. Department of Education’s satisfaction extenuating circumstances” relating to the credit record. The department says that students whose parents are denied a loan might be eligible for additional federal student loans.

It’s worth noting a few more facts about the federal parent PLUS loans. The interest rate is fixed at 7.9 percent, which is higher than the rate for federal Stafford loans to undergraduates. Until July 1, the Stafford subsidized loan rate is 3.4 percent and the unsubsidized rate is 6.8 percent. On July 1, unless Congress intervenes, the 3.4 percent rate for subsidized Stafford loans will double. (The subsidized loans, for students in financial need, do not accrue interest while the students are in school.)

For the time they are in college, the total amount that dependent undergraduates can borrow through the Stafford loans is capped at $31,000.

The amount that parents can borrow through the PLUS loans is potentially far more. The borrowing limit is the projected cost of attendance at a school minus other financial aid a student receives. Some critics of PLUS loans say that means parents are vulnerable to taking on too much debt, which federal officials acknowledge is an issue of concern.

Nick Anderson covers higher education for The Washington Post. He has been a writer and editor at The Post since 2005.

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