Which Type of Federal Loan Requires a Credit Check?

Federal student loans offer a pathway for many individuals to pursue higher education, helping to cover tuition, living expenses, and other educational costs. While these loans are generally designed to be accessible, their requirements can vary significantly. Understanding which types of federal loans involve a credit assessment can help applicants prepare for the process. This distinction is important for prospective students and their families navigating financing options for college or graduate school.

Federal Loans Requiring a Credit Check

The primary federal loan that requires a credit check is the Direct PLUS Loan, available to graduate or professional students (Grad PLUS) and parents of dependent undergraduate students (Parent PLUS). These loans are designed to help cover educational expenses up to the cost of attendance, minus any other financial aid received. The credit check for Direct PLUS Loans does not typically assess a credit score, but rather looks for an “adverse credit history”. Direct PLUS Loans are issued through the U.S. Department of Education and offer fixed interest rates. Unlike some other federal loans, eligibility for PLUS Loans is not based on financial need.

Federal Loans Not Requiring a Credit Check

Many federal student loans do not require a credit check, making them highly accessible for students regardless of their credit history. These include Direct Subsidized Loans and Direct Unsubsidized Loans, which are foundational components of federal student aid. Direct Subsidized Loans are offered to undergraduate students who demonstrate financial need, with the government paying the interest while the student is in school at least half-time, during a grace period, and during deferment periods.

Direct Unsubsidized Loans are available to undergraduate and graduate students, and eligibility is not based on financial need. While these loans do not require a credit check, interest begins to accrue immediately after the funds are disbursed, even while the student is in school. Although Perkins Loans historically did not require a credit check, they are no longer available.

Navigating the Federal Loan Credit Check

For federal Direct PLUS Loans, the Department of Education conducts a specific credit check to identify an “adverse credit history” rather than a credit score. An applicant is generally considered to have an adverse credit history if they have one or more debts totaling over $2,085 that are 90 or more days delinquent, or have been placed in collection or charged off within the past two years. Additionally, certain events within the past five years can constitute adverse credit, such as a default determination, discharge of debts in bankruptcy, foreclosure, repossession, tax lien, wage garnishment, or a write-off of federal student aid debt.

If an applicant is found to have an adverse credit history, there are still pathways to qualify for a Direct PLUS Loan. One option is to obtain an endorser, which is similar to a co-signer, who does not have an adverse credit history. Another possibility involves documenting and demonstrating to the Department of Education that there are extenuating circumstances related to the adverse credit history. If either of these options is pursued, the applicant will also be required to complete PLUS counseling before the loan can be disbursed.