How to get a Federal Parent PLUS Loan with bad credit
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By Carrie Pallardy

March 17, 2021

Parents of dependent undergraduate students can apply for a Federal Direct PLUS Loan to help cover the family’s share of college costs — in addition to any financial aid packages received. Before applying for a parent PLUS loan, it is important to understand how your credit history affects your loan eligibility. You might be surprised to learn that there are student loan options for parents with bad credit.

Here’s what you need to know about parent PLUS loan credit requirements and how you can secure this type of loan even with bad credit.

How Do Parent PLUS Loans Work?

Parent PLUS loans are a type of federal student loan that parents can get and use to pay for their child’s education.

Borrowing limits and costs

Like other student loans, there are limits on how much money a parent can borrow using a parent PLUS loan. Parents can get loans for up to the college’s total cost of attendance, minus any financial aid that the student they are borrowing for receives. This includes financial aid in the form of scholarships and grants as well as loans given directly to the student by the government. 

For example, if a school’s cost of attendance is $40,000 and the child receives a $20,000 scholarship and $10,000 in federal loans, their parent can borrow a maximum of $10,000 through a Parent PLUS loan.

You are not obligated to borrow the full amount offered by a parent PLUS loan. You can choose to refuse some or all of the loan amount offered. 

The interest rate on parent PLUS loans varies over time and is based on market interest rates. The interest rate for loans disbursed between July 1st, 2020, and June 30, 2021 is 5.30%.

On top of the interest, parents must pay an origination fee when they receive the loan. This fee also changes from year to year. The fee for loans disbursed between October 1st, 2020 and September 30, 2021 is 4.228%

Parents can apply for PLUS loans each year their child is in school.

Payments

Taking on a loan means repaying that loan and parent PLUS loans are no different. Like federal loans for students, there are a few things that make PLUS loans different from other types of loans.

One is that parent PLUS loans are eligible for deferment. You can avoid making payments on your PLUS loan for as long as your child remains enrolled in school at least half-time. Your first payment will come due six months after they leave school. 

During a deferment, interest continues to accrue on the loan, which means its balance will grow.

If you do not request a deferment, you’ll have to start making monthly payments immediately after the government disburses the loan. Your loan servicer will contact you with information, such as when your first payment is due and how you should submit payment.

Repayment terms 

There are three different repayment terms to choose from for parent PLUS loans, Standard Repayment, Graduated Repayment, and Extended Repayment. 

Under the Standard Repayment Plan, parents make fixed payments of at least $50 each month to pay down their debt. Under this plan, the payment is set so that the parent will pay off the debt in no more than 10 years.

The Graduated Repayment Plan starts with low payments and increases them over time. Every two years, the monthly payment will increase. The payment will never be less than the amount of interest that accrues each month or more than triple the lowest payment you’ve had to make.

This plan is designed for parents with low incomes, but who expect their incomes to increase over time. Under this plan, parents repay their loans within 10 years.

The Extended Repayment Plan is available to parents with at least $30,000 in direct loans from the government. You can sign up for flat or graduated monthly payments and take up to 25 years to repay the debt.

Parents can also consolidate their PLUS loans using a Direct Consolidation Loan, making them eligible for an Income-Contingent Repayment Plan. Under this plan parents will pay 20% of their discretionary income or the amount it would take to repay the debt in 12 years, whichever is less. After 25 years, the parent can apply for loan forgiveness.

Parent PLUS loan eligibility and credit history

Federal Direct Parent PLUS Loans are available to parents of dependent undergraduate students. Under the eligibility requirements, the loan applicant cannot have an adverse credit history. Adverse credit history is determined by examining the borrower’s credit report for the past two years and five years. Parents may not be eligible for student loans if they have bad credit.

A borrower has an adverse credit history if:

  • Their credit report includes total debt of $2,085 or more that is at least 90 days delinquency.
  • The credit report includes total debt of $2,085 or more that has been sent to collections or written off in the past two years.
  • Any of the following appears on the credit report as occurring within the past five years:
    • Default determination
    • Bankruptcy discharge
    • Foreclosure
    • Repossession
    • Tax lien
    • Wage garnishment
    • Write-off of federal student aid debt

Correct errors in your credit report

Don’t wait to find out whether you have an adverse credit history by applying for a Parent PLUS loan. Check your credit report in advance. You are entitled to receive a free copy of your credit report at annualcreditreport.com every 12 months from Equifax, Experian, and TransUnion, the three national credit reporting agencies.

Carefully review your credit report for derogatory marks. These marks are what will determine if your credit history is adverse or not. If you see any derogatory marks you believe were made in error, you can dispute those errors with the credit reporting companies. This can take some time, so be sure to get a copy of your credit report ahead of time to prepare for Parent PLUS Loan filing deadlines.

If you have a low FICO credit score, but you do not have any of the adverse credit criteria, you are eligible for a Parent PLUS loan. The Parent PLUS loan does not depend on credit scores or debt-to-income ratios.

How to get a Parent PLUS student loan with bad credit

If you do have an adverse credit history, there are several steps you can take to still qualify for a Parent PLUS loan.

  1. Repair your credit. Bad credit does not have to be permanent. If possible, you can make payments on delinquent accounts and bring them up-to-date, curing the delinquency. Afterward, your credit score may still be low, but you might no longer have bad credit, and you may qualify for a student loan.
  2. Appeal the adverse credit history determination. The events that lead to adverse credit can be beyond your control. If there are extenuating circumstances, you may be able to appeal the adverse credit history determination. Extenuating circumstances can include errors in your credit report that don’t accurately reflect the resolution of derogatory marks. For example, if your debt was paid in full or satisfactory repayment arrangements have been made, the debt was included in a Chapter 13 bankruptcy, the debt was refinanced, or the debt was assigned to your ex-spouse in the divorce decree and this isn’t reflected in your credit report, you can appeal the adverse credit determination. If any of these circumstances apply, gather any relevant documentation relating to the extenuating circumstances that led to the adverse credit history. The U.S. Department of Education will then make a determination about your eligibility.
  3. Find an endorser. If you are unable to appeal the adverse credit determination or repair your credit, you have the option of using an endorser. An endorser, much like a cosigner, is someone who agrees to repay the Parent PLUS Loan if you are unable to do so. Endorsers need to undergo a credit check and cannot have an adverse credit history. The endorser cannot be the child on whose behalf the Parent PLUS Loan is borrowed.

If you do gain eligibility through the appeals process or with the help of an endorser, you will need to take one more step, PLUS Loan Credit Counseling, before securing the loan.

Can I or My Lenders Make a Child Pay for a Parent PLUS Loan?

One concern that many parents have is that because Parent PLUS Loans pay for a child’s education, their child will have to pay the debts if the parents aren’t able to do so.

Only parents are liable for repaying parent PLUS loans. The student does not have to sign the master promissory note for the loan before the government disburses the funds and doesn’t have to take any responsibility for repaying the debt.

Only the parents and their endorser, if they have one, have to repay the loans. Parents also cannot transfer their debt to their children. The child can agree to help make payments but is not required to. However, these kinds of side agreements might be an alternative way for students to access more funds to pay for college depending on your situation.

Can Borrowers of Parent PLUS Loans Qualify for Loan Forgiveness?

One of the most valuable benefits of federal student loans is that borrowers can qualify for loan forgiveness.

For students, there are many programs that can help them qualify for forgiveness, such as Public Service Loan Forgiveness.

Just like student borrowers, parents might be able to qualify for loan forgiveness under certain circumstances. These programs can save you a lot of money in the long run.

The only time a Parent PLUS Loan may be eligible for forgiveness is if the borrower consolidates the loan into a Federal Direct Consolidation Loan and changes to an Income-Contingent Repayment (ICR) Plan. Once on an ICR Plan, the parent can begin working toward loan forgiveness.

Parent PLUS loans that are included in a Federal Direct Consolidation loan may be eligible for Public Service Loan Forgiveness. Under the Public Service Loan Forgiveness (PSLF) program, borrowers may be able to get their loans forgiven if they work for a qualifying employer, such as a government entity or a non-profit. If you qualify for PSLF, your remaining loan balance is forgiven after you’ve made 120 payments while working for a qualifying employer. 

An ICR plan forgives any remaining parent loan balances after 25 years.

There are also options for student loan relief due to hardships caused by Covid-19. The government suspended loan payments and stopped charging interest on federally-owned loans at the beginning of the pandemic, and has extended that protection through at least September 30th, 2021. This applies to parent-held loans as well as student-held loans.

Other Options for Parents with Bad Credit

If you’re a parent with poor credit and cannot qualify for parent PLUS loans, there are other ways that you can help pay for your child’s education.

Private student loans

Parent PLUS loans come from the federal government, but they aren’t the only type of student loans available for parents. There are many private lenders that will let parents borrow money to help pay for their children’s education.You may even be able to find one that offers student loans for parents with bad credit.

However, unlike federal loans, private student loans don’t qualify for loan forgiveness and other benefits, like deferment and forbearance options, are often less generous.

Private student loans also tend to be more expensive, charging higher fees and higher interest rates than government loans. This will be especially true if you have a poor credit score. You may struggle to qualify, and the loan will have a significantly higher interest rate than a Parent PLUS Loan.




Secured loans

One popular strategy for people who need to borrow money but who have poor credit is to turn to a secured loan.

A secured loan, such as a home equity loan, is any loan that has some form of collateral securing the debt. For example, when you get a mortgage to buy a home, the home serves as collateral for the debt. If you fail to make your monthly payments, the lender can foreclose on your home and sell it off to recover the money it lost. If you stop making payments on a car loan, the lender can repossess the car.

Unsecured debt has no asset serving as collateral, which means that the lender can’t foreclose on anything and repossess it if you stop making payments. This makes unsecured debt much riskier for lenders.

Because of the lower risk, secured loans are often easier to qualify for than unsecured loans. Even if you have a poor credit score, you may be able to use a home equity loan or another secured loan to borrow money to pay for your child’s education.

Secured loans also tend to have lower interest rates than unsecured loans, which is another reason they’re popular with borrowers.

For borrowers, getting a secured loan means you’re taking on more risk. For example, if you stop making payments on a home equity loan that you’re using to pay for college, the lender can foreclose on your home. You also need to repay the loan if you want to sell your home.

Help your student reduce costs or find other funding

Student loans are a popular ways to pay for college, but there are other ways to bring down costs. Here are some ways to cut costs if you’re not able to find any student loans for parents with bad credit.

One of the things that parents can do to help their children pay for college or save money is to let them live at home while taking classes. Room and board at school can be very expensive, so if a child is attending a school near home, living at home can save thousands of dollars each year.

The student can still get involved with campus life by joining clubs, attending sporting events, and hanging out around campus, but saving on room and board can save parents from having to get Parent PLUS Loans in the first place.

Parents can also work to help their children find other sources of funding for school. There are thousands of scholarships and grants that students can apply for. Parents should keep an eye out for these opportunities. Many local community organizations offer small scholarships to local students. Even if the award is a few hundred dollars, every bit helps.

Anything that parents can do to help their children make money to reduce college costs can help, even if they aren’t able to pay for tuition using a Parent PLUS Loan.

Conclusion

A college education is a good way to set your kids up for success in the future, but it’s expensive. Many parents want to help pay for college, but it can be difficult if you have adverse credit. But, you may have some luck finding student loans for parents with bad credit.

If you have enough time, you can work to repair your credit ahead of time to qualify for federal loans. Be sure to take advantage of PLUS Loan Credit Counseling to find out how you might qualify for Parent PLUS Loans. You can also start looking for alternative sources of funding, such as scholarships and grants, to help pay for college. If you reduce college costs enough, you won’t have to worry about finding student loans for parents with bad credit.

See also: Complete Guide to Parent Loans

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