Over the years, I’ve worked with many families who are shocked to hear that their children cannot borrow the full amount that they need to cover all college expenses not covered with financial aid. Undergraduates are actually quite limited in the amount they can borrow in their name alone: $5,500 for their first year, $6,500 for sophomore year, and $7,500 for junior and senior years. That’s only $27,000 in Federal Direct Loans for a student who is enrolled for four years. With high college expenses, these limited amounts may not go far in terms of covering that tuition bill.
In order for students to receive additional loan funding beyond the Federal Direct Loans, they’ll need a parent to borrow a parent loan or someone to co-sign a private student loan with them. This is when a credit issue can throw a wrench into the college funding plan. If a parent does not have sufficient positive credit history, or appropriate debt-to-income ratio, they may not be approved to co-sign a private student loan. Although the Federal Parent PLUS loan has the most lenient credit check, not involving a debt-to-income ratio, a PLUS Loan will be denied if the parent has recent adverse credit history. Generally, this means you cannot be over 90 days late on a combined debt greater than $2,000 and still be approved for a PLUS Loan.
What can you do if you cannot borrow or co-sign for your student?
There are a few options:
- A student whose parent applies for and is denied a Federal Parent PLUS loan can borrow $4,000 or $5,000 additional Unsubsidized Federal Direct loan funds each year, depending on their year in college (see this chart). While this should help a bit, it may not be enough. An important note: if one parent is denied the PLUS loan, but the other was approved, the student cannot borrow the additional unsubsidized loan.
- If a parent has someone who is willing to co-sign a Parent PLUS Loan with them, then they can add what the Department of Education calls an “endorser” to their PLUS loan application. This endorser will be responsible for the debt if the parent defaults during repayment, so it is a serious obligation. The endorser’s credit history will be affected by this debt they take on, negatively so if a parent is late or defaults on the loan at any time. And once a PLUS loan is approved with an endorser, the student is no longer eligible to borrow the additional Unsubsidized Loan noted above. Once an endorser is added to a PLUS loan and the loan is disbursed to the student account, an endorser cannot be freed from this debt until the loan is repaid in full.
- If a parent who was denied the PLUS loan has cleared up the account(s) that caused the denial, they can appeal to the Department of Education for another review. Documentation will likely be required if the credit report is not updated at the time of the credit appeal. If approved, the student can no longer borrow additional Unsubsidized Loan.
- Alternately, a student can have someone else—whether it be a grandparent, aunt, uncle, family friend, etc.—co-sign a private student loan with them. The relationship does not matter, as long as the co-borrower has sufficient credit history and income per the lender’s standards. However, just as an endorsing a loan application is a serious obligation, so is co-signing. The co-signer will be responsible for the debt as long as they are included as a co-signer on the loan. Some private lenders offer co-signer release options after 12, 24, or 36 months of on-time payments. However, this release does not happen automatically. The student borrower must apply for the co-signer release and have sufficient income and credit history according to the lender’s standards in order to be approved. Basically, the borrower needs to be able to prove they are now in a position to repay the loan on their own.
Are there other ways to release an endorser or co-signer?
Down the road in repayment, a parent or student borrower can apply for a student loan refinance product through one of the private lenders who offer it. Again, the parent or student will need to be able to prove they can now handle repaying this loan debt on their own without an endorser or co-signer as back-up. Additionally, a parent PLUS borrower would lose any federal benefits such as various repayment options, deferment, forbearance, possible forgiveness, cancellation, and discharge once a federal loan is refinanced into a private loan.
Students who are close to completing their undergraduate degree may want to check in with their financial aid office to see if they offer an institutional loan for students who are unable to borrow elsewhere. Some colleges may be willing to approve loans from their own budget in order to help the student graduate. They are unlikely to offer this to a student who is about to enroll for the first time, however, as this financing is a huge risk to the college.
And if the student is looking to enroll in a college and unable to secure enough funding, it may not be the best financial fit. As May 1st first is mere weeks away, we urge all high school seniors to seriously consider their estimated overall student loan debt (for all 4 years, not just the 1st year!) before depositing at a college that is financially out of reach.