Bankruptcy is a complicated issue that affects many areas of one’s life, but in general, filing for bankruptcy doesn’t interfere with eligibility to receive federal aid.
It can, however, affect eligibility for some student loans and loan programs, but it might not be as bad as you think.
A green light for financial aid and federal loans
A parent’s bankruptcy has no direct impact on their child’s eligibility for federal student aid. Even if their parents have a bankruptcy (present or past), a child remains eligible for federal student loans. An example is the Stafford loan which does not depend on the borrower’s credit history in any way.
The Bankruptcy Reform Act of 1994 amended the US Bankruptcy Code to make sure government student grants and loans couldn’t be denied based solely on the student’s or borrower’s filing of a bankruptcy. The only exception is the Federal PLUS loan.
PLUS loans – not so much
Direct (parent) PLUS loans are federal loans that parents of dependent undergrad students can use to help pay for college. The U.S. Department of Education is the lender, and they conduct credit checks, so those with an adverse credit history are not eligible.
Adverse credit history can be defined as having had a bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment or default determination in the last 5 years, or current delinquency on any debt of 90 days or more. Parents remain ineligible for 5 years from the date of the bankruptcy discharge.
The good news
If a child’s parent is denied a PLUS loan because of adverse credit history, the child becomes eligible for increased unsubsidized Stafford loan limits. The loan limits are increased by $4000 per year during the student’s freshman and sophomore years, and $5000 during their junior and senior years. Some prefer this since the unsubsidized Stafford loan has a lower (and fixed) interest rate than the PLUS loan.
And there is always a PLUS loan option without the parents
A grad PLUS loan is an option for graduate or professional students to apply for on their own, which means a parent’s credit history would not apply. A parent’s history of bankruptcy also doesn’t affect their child’s eligibility for federal grants, state grants, scholarships and money from the college. Nor does it affect their child’s enrollment in student employment programs like Federal Work-Study.
Whether or not bankruptcy will affect access to student loans and financial aid is a complex topic. It depends on the nature of the student loan programs, whether they are federal or private, and the type and timing of the bankruptcy.
Some education loan programs (like PLUS and private loans) are not available to parents with adverse credit. Some programs (like unsubsidized Stafford loans) wind up with higher limits for children with parents that have an adverse credit history. Rule to remember: a parent’s bankruptcy has no direct impact on a child’s eligibility for federal student aid and federal student loans.
Whatever the circumstances, talk to the financial administrator at the school for a special circumstances review or financial aid appeal. And consult with a trusted attorney on the impact of bankruptcy in order to be fully informed of your options.
Contact Experienced Bankruptcy Attorney Joel R. Spivack Today!
At the Law Office of Joel R. Spivack, we specifically focus on helping clients get through challenging financial times. If you need guidance and support for your unique situation, reach out to Attorney Joel Spivack today. He will help you regain control of your financial situation.
Attorney Spivack offers a free, face-to-face consultation at our office in Cherry Hill, NJ. He will provide you with honest answers to your questions and tell you how he can make the process go as smoothly as possible for your specific issues. Call 856-488-1200 or fill out our online contact form here.
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