PLUS Loan Denial Rate 2X Higher In FFEL Program in 2007-08, FinAid Research Finds

Here is a link to the research on the FinAid site. 

Here are the Parent PLUS loan denial rates for 2008-09 calculated by FinAid using the National Postsecondary Student Aid Study (NPSAS):

Overall:  37%
DL program:  21%
FFEL program:  42%

Mark Kantrowitz, the author of this paper, explains how this difference likely came about:

"Anecdotal evidence suggests that several FFEL program lenders are incorrectly implementing the definition of an adverse credit history by using a five-year lookback for the 90-day delinquency restriction instead of limiting it to just current 90-day delinquencies (Footnote:  This is technically not a violation of the regulations, since 34 CFR 682.201(c)(2)(iii) permits FFEL program lenders to adopt more stringent credit underwriting criteria).  This would necessarily lead to increased PLUS denial rates.  Since such a five-year lookback on delinquencies would represent a more stringent credit underwriting standard than education lenders use for private student loans, this error would likely lead to a shifting of some borrowers from the PLUS loan to private student loans."

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This analysis raises a few obvious questions:  What was the rationale for the regulations permitting FFEL lenders the flexibility to adopt more stringent underwriting criteria?  Who could not foresee the unintended consequence of a likely shift to private loans, which are more profitable for lenders and more onerous for borrowers?  Earlier this year, I had heard that several FFEL lenders had adapted their PLUS programs to not allow parents to add an endorser, which would improve their odds of having their loan approved.   In an October 2008 post, I noted that data from the Dept. of Education showed that PLUS loans were harder to come by.  I think we may understand the "why" part better now.

So, I guess those Parent PLUS borrowers at Direct Lending institutions should thank their lucky stars.  They not only have the benefit of a lower interest rate (7.9% vs. 8.5%) but have loan denial rates 1/2 the rate of FFEL lenders. 

Update (September 1, 2009):  The irony here is that 50% of FFEL loans are expected to be financed through ECASLA financing programs which makes the justification for tighter underwriting seem to go out the window since the government will be the loan holders.  Since legislators missed this opportunity with ECASLA, perhaps there will be a debt swap program for rejected PLUS borrowers who decided to take out private loans.