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Will bankruptcy affect eligibility for financial aid?

scholarships.jpegCollege is expensive, and therefore, the decision of which school a student will attend can be heavily influenced by the amount of financial aid received. There are many factors taken into consideration when financial aid is determined, including academic achievement, cost of attendance, and expected family contribution.

Bankruptcy can affect an individual's credit and can remain on a credit report for up to 10 years. With this kind of financial history, would a parent's bankruptcy filing affect his or her child's eligibility for financial aid? It depends on the type of loan.

How bankruptcy affects student loan eligibility

A previous bankruptcy can affect eligibility for some education loans, but it does not affect eligibility for other forms of financial aid.

The Bankruptcy Reform Act of 1994 prohibits the denial of government student grants and loans based solely on the student's or borrower's past or present filing of a bankruptcy petition (with the exception of the Federal PLUS loan).

A child is eligible for federal student loans, such as the Stafford loan, regardless of a parent's history of bankruptcy. A parent's credit history also does not affect the child's eligibility for federal grants, state grants, and scholarships from the school or third-party organizations.

Unlike Stafford loans, you must pass a credit check in order to obtain a Parent PLUS Loan. The Parent PLUS loan is a federal student loan that is available to the parents of a dependent undergraduate student. By law, PLUS loan borrowers cannot have an adverse credit history. Therefore, parents who have had a recent bankruptcy discharge, foreclosure, tax lien, or wage garnishment may not be eligible to borrow through the PLUS program.

A parent who has been denied a PLUS loan due to adverse credit history can still obtain this loan if:

  1. There is documentation explaining the extenuating circumstances of the adverse credit history; or
  2. The borrower obtains a cosigner who does not have an adverse credit history. However, the endorser must be someone other than the dependent student for whom the PLUS loan is being borrowed.

It is important to note that the provisions of the above act only apply to federal student loans; not private loans. If you filed bankruptcy in the last 10 years, that will negatively affect your credit score; and in turn, the less likely it is that you will qualify for a private student loan. If you are able to get a loan, it may come with a high interest rate and fees.

If you have further questions regarding bankruptcy filings and student loan eligibility, please do not hesitate to contact our attorneys.

THE FOREGOING IS INTENDED TO BE A GENERAL DISCUSSION OF THE LAW AND IS NOT INTENDED TO BE CONSTRUED AS LEGAL ADVICE. IF YOU HAVE A SPECIFIC QUESTION, PLEASE CONTACT OUR OFFICE AND SPEAK WITH AN ATTORNEY.

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