I was scanning the recent report that the Iowa Attorney General put out on Friday regarding the state agency, the Iowa Student Loan Liquidity Corporation (ISL). Buried within the 88 page report, is an interesting disclosure regarding how PLUS borrowers were evaluated by the contractor that ISL's guarantor had hired to complete this task.
The damning paragraph from the report by Mark Kantrowitz for the attorney general (which he provided on a pro bono basis) reads as follows:
"As noted above, federal regulations require lenders to deny a PLUS loan to a borrower with a current delinquency of 90 or more days on any debt. Prospective ISL PLUS loan borrowers, however, appear to have been subjected to a five-year lookback on the 90-day delinquencies. This is a more stringent standard than imposed by other lenders and guarantee agencies. The five-year lookback on 90-day delinquencies potentially explains why ISL has a very high PLUS loan denial rate as compared with other lenders and contributes to the apparent shifting from PLUS loan volume to private loan volume."
So, in effect, the lender ISL (or the contractor who they blamed for this) were denying PLUS loans by using criteria more stringent than the federal regulations. These PLUS denials were leading more borrowers to turn to what are often higher cost private loans.
Tip: Ask all of your FFELP and private lenders to provide you with their PLUS approval rates on a national basis and for borrowers at your school. Review the data for the past three years to discern any trends. Then do the following:
a. Calculate the average approval rate for all of your lenders nationally and for borrowers at your school.
b. Determine if any lenders have approval rates far below the averages you have calculated. Ask for a written explanation to explain their low approval rates. Given that inadequate oversight allowed the situation above to persist for years, it may pay to be a bit skeptical about claims that "we just follow the federal regulations." Ask for the specific breakdown of the reasons that PLUS loans are being denied.
c. With razor-thin to non-existent margins for lenders on FFELP loans and healthy margins on private loans, be sure that your PLUS borrowers are being given every opportunity to get the PLUS. Ask for second looks and then suggest an endorser. With no end in sight to the ratcheting up of private loan interest rates while approval rates for private loans plummet, your PLUS borrowers will appreciate your diligence.