Does Bankruptcy Affect Student Loan Eligibility?

When you’re facing insurmountable payments from credit card debt or medical bills, filing for personal bankruptcy may be able to provide you with some relief. And while it’s much easier to recover from bankruptcy than most Americans believe, it’s important to understand how consumer bankruptcy is likely to affect you in the years immediately following your decision to file. In particular, you should know that bankruptcy may limit your access to student loans and certain kinds of educational funding.
Parent PLUS Loans and Bankruptcy
According to an article in U.S. News & World Report, Americans shouldn’t be so quick to discount the positive consequences of personal bankruptcy. To be sure, it can be the best way “to catch a breath and start to rebuild” after a period of unemployment or other financial hardship. At the same time, however, the article emphasizes that filing for bankruptcy can make it difficult, in the short term, to secure certain loans. Indeed, “the fallout can, in some cases, affect college financing.”
When parents file for personal bankruptcy, they’re ineligible to borrow a PLUS loan for five years following the discharge of their debts. PLUS loans are federal loans often borrowed by graduate students or parents of undergraduate students to help pay tuition and other educational expenses. PLUS loans are intended to provide money for expenses that aren’t covered by other financial aid possibilities. Like other federal student loans, they’re low-rate, fixed-interest loans. However, they do require a credit check.
On top of PLUS loan eligibility, parents likely won’t be able to help their dependent undergraduate students to secure private loans. According to the U.S. News article, private loans can be “out of the question for as long as seven to ten years.” At the same time, parents should remember that, if they’re thinking about filing for bankruptcy but worried about how it will affect their kids’ eligibility for student loans, those parents likely already have bad credit. And if those parents don’t have good credit—regardless of whether they’ve declared bankruptcy—it’s likely that they won’t be able to help out with these loans, anyway.
Bankruptcy Benefits to Undergraduate Students
While a parent’s decision to file for Chapter 7 bankruptcy can mean that a student won’t be able to use a PLUS loan to cover expenses, the bankruptcy actually might end up helping the student out in other ways. For instance, “students whose parents are denied a PLUS loan can get a boost in their Stafford loan eligibility, increasing the amount awarded by as much as $5,000.” And Stafford loans have lower interest rates than PLUS loans.
In addition to allowing their kids to get a Stafford loan “boost,” parents should also keep in mind that filing for bankruptcy simply cannot hurt their student’s chances of obtaining “Pell Grants, Perkins loans, and other federal funding.”
But if you’re thinking about filing for bankruptcy and returning to graduate school within the next five years, you might need to rethink your decision. Just like parents whose eligibility for PLUS loans is limited after filing for bankruptcy, a potential graduate student cannot be eligible for a PLUS loan for five years within the discharge of her debts. And that ineligibility can mean high-interest loans for tuition and other graduate school-related expenses.
Bankruptcy law is extremely complicated, and you should never make the decision to file for bankruptcy without speaking with an experienced Oak Park bankruptcy lawyer. Contact the Emerson Law Firm today to discuss your situation with one of our dedicated consumer advocates.
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