A technical glitch within Federal Student Aid (FSA) caused some 1,600 PLUS Loan applicants to have erroneously received loan disbursements, the agency said in an email to affected schools Thursday.
The system error—which has now been resolved—"caused incorrect credit evaluations to occur" on some applicants' credit checks, leading some applicants with an adverse credit history to be approved for and receive the federal loan, the email said. It's unclear when the error began and how long it persisted.
Having an adverse credit history would prevent the borrowers from receiving any additional PLUS Loan disbursements—even if they received an inaccurate disbursement as a result of the system error.
Moving forward, FSA has grouped the applicants into three categories: those who have fully disbursed loans, those who have partially disbursed loans, and those who have not received disbursements. FSA said it will also notify the impacted applicants about the change in the credit check status and their available options. It has also identified the affected borrowers to the institutions.
"For Direct PLUS Loans that are fully disbursed, no further action is needed by the school," the notice said. "For Direct PLUS Loans that are partially disbursed, the school can review other options that may be available to applicants with an adverse credit history."
Generally there is less data and research about who takes out PLUS Loans, which can be taken out by graduate and professional students or the parents of dependent undergraduate students, than other types of federal loans. As of the fourth quarter of 2017, there were 3.5 million borrowers with $83.9 billion in outstanding Parent PLUS Loans, and 1.2 million borrowers with $59.7 billion in outstanding Grad PLUS Loans, according to data from FSA. Data released by the Department of Education (ED) in 2014 showed that the three-year cohort default rate for PLUS Loan recipients was actually lower than the rates for their counterparts in the Stafford Loan program.
Think tanks and thought leaders in higher education have pointed to flaws in the PLUS Loan program, arguing that the Parent PLUS Loan program "invokes predatory lending," or that the program should be eliminated altogether in favor of boosting funding for grants.
While the system error appears to be much smaller in scope, processing errors centered on PLUS loan credit worthiness bring to mind a larger issue in 2011 when ED changed underwriting standards on PLUS that resulted in scores of previously approved parents and graduate student being suddenly denied. The change hit students at open access schools and Historically Black Colleges and Universities (HBCUs) hardest. The entire situation ultimately resulted in a public apology from then Secretary of Education Arne Duncan.
ED did not elaborate on the system error that generated the errors.
Publication Date: 3/9/2018