In a Notice of Proposed Rulemaking (NPRM) published Friday, the Department of Education (ED) proposes changes to the definition of “adverse credit history.” ED would also require counseling for certain PLUS borrowers with adverse credit who have extenuating circumstances. With these proposals, ED seeks to strike a balance between increasing availability of PLUS loan funds to improve student access to postsecondary education and helping to limit overborrowing through improved financial literacy.
The NPRM codifies some existing ED practices and contains several proposed changes that would relax current PLUS loan underwriting standards. The NPRM is a result of negotiated rulemaking conducted this past February through April and explains ED’s justifications for the proposed changes. Consensus was not reached on the entire package of negotiated topics, but negotiators did reach tentative agreement on the PLUS issue. Although ED was not obligated by negotiating protocols to adhere to the agreed upon wording in the NPRM, the proposed rules do in fact reflect the proposed rules as agreed to during negotiations. The current regulations governing adverse credit history determinations have not been updated since the Direct Loan Program was established in 1994.
The proposed regulations would:
During negotiations, non-federal negotiators raised the possibility of different definitions of adverse credit history for parents versus graduate students. ED stated that it does not have the statutory authority to implement different regulatory definitions of “adverse credit history” for the different types of borrowers, noting that, pursuant to the Higher Education Act (HEA), there is a single PLUS loan program that provides loans for both graduate and professional students and parents of dependent students.
Under both current and proposed regulations, an applicant who has debts that are in collection or that have been charged off will be determined to have an adverse credit history, but the current regulations do not define these terms. The proposed definitions for these terms are commonly understood definitions in the collections industry.
The proposed regulations would:
Regulations would retain the current provision that provides that a parent or student borrower has an adverse credit history if the borrower 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 of the HEA during the five years preceding the date of the credit report.
Under current operational practice, a borrower with debts in collection or debts that have been charged off in the preceding five years is considered to have an adverse credit history. The proposed rules shorten the “look-back” period for collections and charge-offs from five years to two years, and incorporate a $2,085 threshold for debts that are 90 or more days delinquent.
Several non-federal negotiators raised the possibility of a minimum dollar amount for delinquent debts, noting that current rules dictate that an applicant with a delinquent debt of 90 or more days is determined to have an adverse credit history regardless of the dollar amount of that delinquent debt.
ED’s proposed $2,085 threshold is derived from the current extenuating circumstances process, whereby an applicant who is determined to have an adverse credit history can provide documentation of extenuating circumstances to ED. Current rules specify that, for purposes of documenting extenuating circumstances, ED may rely on a satisfactory statement from the applicant explaining any delinquency with an outstanding balance greater than $500. In recent years, the $500 threshold has been increased to $780 to reflect inflation and then to $2,085. ED selected this level to reflect the estimated median debt level for all debts with a status of in collection, charged off, or 90 or more days delinquent, from all parent PLUS loan denials resulting from all credit checks conducted between the spring of 2012 and the spring of 2013.
ED now proposes to use the $2,085 threshold amount in the initial determination of whether an applicant has an adverse credit history. Therefore, the amount of the applicant’s delinquent debt would be taken into account during the initial determination of whether the applicant has an adverse credit history, rather than as part of the process for documenting extenuating circumstances following denial of a PLUS loan.
In response to the requests of negotiators, ED indicated that it is open to adjusting the $2,085 amount and proposes that ED may adjust the amount over time, on a basis determined by the Secretary. Any adjustments that ED makes to the $2,085 amount would be announced through a Notice in the Federal Register. ED invites comment on this provision, and welcomes recommendations on an appropriate measure of inflation to use in adjusting this amount, or whether another measure of growth or decline in consumer debt due to economic conditions may be a more appropriate measure.
As a result of moving the consideration of the amount of the delinquent debt from the extenuating circumstances to the initial PLUS approval process, the proposed rules remove the $500 threshold provision from the extenuating circumstances process.
The proposed regulations would specify that an applicant for a PLUS loan who is determined to have an adverse credit history but who documents to ED’s satisfaction that extenuating circumstances exist must complete PLUS loan counseling offered by ED before receiving the PLUS loan.
The proposed regulations do not apply the loan counseling requirement to a PLUS loan applicant who has an adverse credit history but is eligible to receive a PLUS loan by obtaining an endorser who does not have an adverse credit history. ED is requesting comment on whether the loan counseling requirement for applicants who qualify due to extenuating circumstances should also apply to applicants who obtain an endorser.
Under ED’s current operational practices, an approved credit check remains valid for purposes of determining an applicant’s eligibility to receive a PLUS loan for 90 days from the date on which the credit check was performed.
During the negotiations, many of the non-federal negotiators expressed concern that the current 90-day period is not long enough. They noted that, in certain situations, the requirement that a new credit check be conducted (if the most recent credit check was more than 90 days in the past) can mean that a PLUS loan applicant who was initially approved for a PLUS loan for the purpose of a school’s financial aid award packaging for the upcoming academic year may later be denied the loan if an event that triggers another credit check occurs more than 90 days after the date of the prior credit check, and if the subsequent credit check determines that the borrower has an adverse credit history.
ED has decided to modify its procedures so that a credit check that indicates that the applicant does not have an adverse credit history would remain valid for 180 days. This timeframe will remain a procedural issue and will not be incorporated into regulation. When this change will occur is still unknown, however.
Negotiators expressed concern about the lack of counseling and consumer information provided for parent PLUS applicants. ED stated that while it lacks statutory authority to require loan counseling for all parent PLUS applicants across the board, it will develop enhanced consumer information and resources for parent PLUS applicants that could be incorporated within the existing PLUS loan application process or made available to parents through links to information on other ED web sites. Schools would not be required to disseminate this consumer information, nor would there be any associated requirements for parent PLUS applicants.
At a minimum, ED will offer voluntary entrance counseling to all parent PLUS applicants, which would provide clear information on the monthly payment that would be required for the loan the applicant is requesting as well as what the total monthly payment would be if the applicant borrows the same amount for multiple years. In addition, ED will expand its current online financial tools to include a PLUS-specific loan calculator that would allow parents to evaluate their future ability to repay PLUS loans based on their individual economic circumstances.
ED invites suggestions on the following:
The modifications made in the proposed regulations will increase the number of PLUS loan applicants who pass the adverse credit history check upfront and will not have to request reconsideration of an initial denial under the extenuating circumstances process. ED estimates an increase of approximately 370,000 PLUS loan applicants who will pass the adverse credit history check under the proposed regulations.
In the NPRM, ED states that it would consider designating final regulations resulting from this NPRM for early implementation rather than waiting for the July 1, 2015, effective date dictated by master calendar requirements.
During their discussions, non-federal negotiators introduced several proposals that would require legislative change and therefore, could not be considered at the regulatory level. These suggestions included:
The comment period on this NPRM is limited to 30 days, and comments are due by September 8, 2014. Instructions on how to comment are included in the NPRM. NASFAA welcomes member comments and questions at firstname.lastname@example.org.
Publication Date: 8/13/2014