Consequences of Defaulting on a PLUS Loan

Obtaining a PLUS loan provides a way for students and their parents to fund college costs. The loan, which is made through the Federal Family Educational Loan (FFEL) program or William D. Ford Federal Direct Loan (Direct Loan) program, is a federally funded program that can create some problems for borrowers who default on the loan obligation.

PLUS Loans

The loan is made directly from the federal government to the borrower in the case of the Direct Loan program or with the assistance of a state aid agency and the school in the case of a FFEL. An upfront fee of 4 percent is charged and deducted from the loan to pay the administrative costs of the state agency and/or the Department of Education.

PLUS Loan Repayment

The loan is payable within 60 days after the funds have been disbursed or no later than 6-months after the student ceases to be enrolled at least a 1/2 time. If the parent or student is unable to pay the loan, they may ask for a forbearance, which delays repayment. During this period, the loan accrues interest that can add up once payments begin and increase the likelihood of default.

Loan Default Effect on Credit

A loan that defaults has an effect on the credit rating of the borrower since the loan is reported to the credit monitoring bureaus. This affects a person’s ability to acquire consumer loans such as those for cars and home mortgages. A person’s credit is always impacted as long as the loan is in default status.

Loan Information Use by Employers

Employers and government agencies that issue clearance status use loan information as part of their assessment of character and responsibility. Defaulting on a PLUS Loan may compromise an individual’s chances to obtain government clearance for certain types of civil service jobs. It may also raise certain questions on a private sector job interview.

Loan Information Use by Insurance Companies

Insurance companies use this information as part of their morale hazard underwriting. A morale hazard is one where it is deemed that certain laws or rules do not have to be served, such as paying bills on time. A negative consumer credit report would show the default status of a PLUS loan, which in turn may prevent an individual from acquiring certain types of insurance protection that is needed.

An individual should carefully examine their finances and seek all resources that may be available to them before taking out a PLUS or any other government or private loan. The individual should also plan accordingly on how to pay back the loan and create a budget that will help them meet their obligation in order to avoid defaulting and the consequences associated with a PLUS loan default.


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