Will Bankruptcy affect our Child's College Financial Aid?

Most Financial Aid packages include some loans and if you file for bankruptcy it may affect your child's eligibility for certain loans. The rules for federal loans and private loans are different.

Private student loans, like any other credit after bankruptcy, will depend greatly on the circumstances that surround the bankruptcy. If the student did not file bankruptcy their applications for private loans should not be affected, unless the parent is required as a co-signor. If the parent is required as a co-signor and they filed for bankruptcy they should discuss the circumstances of the bankruptcy with the potential lender. Many private loans will exclude co-signors or borrowers who have filed for bankruptcy within the last seven years no matter what the circumstances. There are no laws that require private companies to loan money in these circumstances and each company will assess their own risk differently.

Federal student loans are governed by specific bankruptcy anti-discrimination rules. Under 11 USC 525(c), lenders backed by the federal student loan programs cannot deny a student a loan based on the student previously filing for bankruptcy. This means that Stafford Loans, which are federal student loans to the student directly, will not be affected by a bankruptcy of either the student or the parents (but can be affected if their are delinquencies or defaults on previous student loans).

PLUS loans, however, (which stands for Parent Loans for Undergraduate Students) can be denied based on negative credit history of the parents. A bankruptcy within the last five years would be considered adverse credit history. If parents apply for and are turned down for PLUS loans students may qualify for increased Stafford loans, which could help make up some of the difference.

For more information read this article on Bankruptcy and Financial Aid.

Thank you to Larry Dannenberg and College Solutions for pointing us to this information.