Does Bankruptcy Affect Student Financial Aid?
TL;DR
Filing for bankruptcy does not automatically make a student ineligible for federal financial aid. However, bankruptcy can affect certain credit-based education loans, particularly Parent PLUS Loans. Private student loans may also be affected because private lenders generally use their own credit standards.
Bankruptcy Does Not Automatically End Federal Financial Aid
A common concern for people considering bankruptcy is whether filing will prevent them or their children from receiving financial aid for college.
Fortunately, many forms of federal student aid are not based on a traditional credit check. Eligibility for programs such as Pell Grants, Federal Work-Study, and Direct Subsidized Loans is based on federal eligibility requirements and, for certain programs, financial need.
Bankruptcy by itself therefore does not mean that a student loses access to federal financial aid.
Parent PLUS Loans Are Different
Parent PLUS Loans do involve a credit check. The Department of Education requires a parent borrower not to have an “adverse credit history,” unless the parent satisfies additional requirements.
A recent bankruptcy discharge can be one of the events considered in that determination.
Even if a parent is denied a PLUS Loan because of adverse credit, there may still be options. A parent may be able to qualify with an eligible endorser or by documenting extenuating circumstances. In addition, a dependent undergraduate student whose parent cannot obtain a PLUS Loan may qualify for additional Direct Unsubsidized Loan funds.
What About Private Student Loans?
Private education loans are different from federal student aid. Private lenders establish their own underwriting and credit requirements, so a bankruptcy may affect whether a borrower qualifies and what terms are offered.
Before turning to private loans, students and parents should understand the federal aid available to them and speak with the school's financial aid office about their options.
Considering Bankruptcy?
Do not assume that filing bankruptcy will prevent you or your child from paying for college. The effect depends on the type of financial aid involved and your individual circumstances.
If you are struggling with debt and concerned about how bankruptcy could affect your family's finances, contact the Law Office of Louis S. Haskell at (978) 459-8359 to discuss your situation.
This article is for general educational purposes only and does not constitute legal or financial advice. Federal student aid rules can change, and individual eligibility depends on the applicable program and circumstances.