As student loan balances climb higher, new repayment options for federal loans, such as Pay As You Earn, allow borrowers to reduce their monthly payments while extending the time it takes to repay. At the same time, people such as law school professors Jonathan Glater of UC Irvine and John Brooks of Georgetown and others have called for an increase in federal loan limits.
Meanwhile the Department of Education (ED) does not scrutinize the ability of first time undergraduate borrowers to repay their Stafford loans. If increased loan amounts are deemed necessary, could credit checks be far behind?
The limit on unsubsidized federal loans for dependent undergrads pursing a BA is currently $31,000. However, degrees that used to take four years now usually take six, and students who max out on federal loans typically turn private lenders like Discover, PNC Bank, Wells Fargo and Navient, formerly known as Sallie Mae. Private lenders represent between 7% to 15% of the market. They don't offer federal pay-off options or loan forgiveness, but check credit scores.
Private loans are also more expensive; a 2012 report by the Consumer Financial Protection Bureau found that interest rates for private student loans were in the 16% range, compared 4.29% for Stafford loans. ED’s website states, “Private lenders can have variable interest rates, some greater than 18%."
"Legally, the Department of Education can't check credit scores for Stafford loans," said Ben Miller, senior director of post-secondary education at the Washington, D.C.-based Center for American Progress. "An act of Congress would be required in order for that to happen."
One type of federal loan, Parent PLUS, for dependent undergrads, and Grad PLUS loans for grad students requires a co-signer who must undergo a credit check. ED says on its website that for PLUS loans, “The borrower must not have an adverse credit history.” ED also stresses that they are intended to supplement other sources of funding. The PLUS loan’s max amount is the cost of attendance, which the school determines, minus other sources of funding.
”The underwriting process of PLUS loans has two parts,” said Miller. “The first determines whether or not ED will lend to you. If the answer is yes, the second part determines the amount of the loan. They can't give an explanation if you're turned down. By law, they can only say whether you're in or out. By law, PLUS loans require a credit report.”
The current interest is 6.84%, a fixed rate on new PLUS loans, is good until July 1, 2016. There’s also a loan origination fee, currently 4.272% of the loan amount, which is deducted from each loan disbursement.
Parent PLUS loans have been the target of criticism, first when lending standards were considered too lax, then when they were considered too restrictive after ED tightened underwriting.
A source at the Department of Education who spoke on background, insisted that PLUS and Grad PLUS loans notwithstanding, checking check credit scores for Stafford loans is pointless. “An 18-year-old just out of high school with no work or credit history doesn’t have anything to check,” this person said.
But student loan borrowers are becoming more diverse, not only in ethnicity or gender, but in age range, marital, family and employment status. Older students who have jobs, debt and kids of their own are applying to colleges and universities for the first time. According to the Washington, D.C-based National Foundation for Credit Counseling (NFCC), almost half of all college students have over $3,000 in credit card debt. These people do have credit histories and credit scores to check.
Credit checks for Stafford loans would likely lead to the same backlash witnessed in the PLUS loan market; people who were denied loans will cry foul. What's more, many colleges and universities, who depend on these loans as much as their students, would see lowered enrollment, perhaps the biggest threat to their ability to operate.
People confronting student loan borrowers in the personal lives are making credit-centric decisions of their own based on that borrower’s ability to pay. According to a poll last January by the National Foundation for Credit Counseling 54% of the respondents said they would not marry their significant other until money borrowed for school was paid off. Of that 54%, 37% said they would not help to retire student loans. The remaining 46% were willing to tie the knot and help pay off the debt.