While bankruptcy is never one’s life goals, the fact is it occurs. Job loss, medical costs, divorce, and life’s other monetary twists and turns can lead folks who never imagined doing so to file intended for bankruptcy protection. Bankruptcy filings have been steadily on the rise over the past one hundred year, especially since the 1980s, with close to a million consumers seeking bankruptcy protection in 2014 . With the massive financial investment decision that comes with college, it is no surprise that will as a college finance educator, I often get questions from parents and students about bankruptcy’s impact on college financial aid. Here are the 3 most common questions I get about bankruptcy and financial aid:
Will my bankruptcy impact my child’s financial aid eligibility?
In short, no . Federal, state, and college-based student aid is not affected by a parent’s previous bankruptcy. A student’s grants and scholarships are neither improved nor decreased due to a parent’s bankruptcy, and he or she can still lend his federal entitlement of $5, 500-$7, 500 annually in Direct Stafford Loans.
So while your bankruptcy will not, automatically, affect your child’s aid eligibility, and is not asked about on the financial aid application, you may want to bring your bankruptcy to the financial aid office’s attention. Because your bankruptcy may impair your own ability to secure parent loans to assist pay your family’s share of college costs (see next question), you can request special consideration for additional grants or institutional loans to help bridge your gap in funding.
I have a bankruptcy in my previous. Will I be able to borrow financial loans to pay for my child’s college?
Depending upon how far removed you happen to be from the bankruptcy, it may prove hard to secure adequate parent loan funding. The most commonly borrowed (and easily accessed) parent education mortgage is the Direct PLUS Loan. The PLUS Loan credit check looks for adverse credit, including bankruptcy, within the past 5 years. In case your bankruptcy falls within that 5-year time frame, your application for credit is going to be denied. If denied a PLUS Loan, you have 3 options:
- Appeal the denial based on extenuating circumstances.
- Obtain an endorser (i. e. a co-signer) for the loan.
- Allow the student to lend an additional $4, 000-$5, 000 Unsubsidized Direct Loan in his or her name.
Can my student loans be discharged within bankruptcy?
Probably not. It is extremely difficult, though not difficult, to have your student loans discharged within bankruptcy. In order to have your own loans discharged, you must be able to convince the court that repayment of the loans would “impose an undue hardship on you and your dependents. ” To prove “undue hardship, ” according to the Department of Education , you must meet all requirements of the following 3-pronged test:
- If you are forced to repay the loan, you would not be in a position to maintain a minimal standard of living.
- There is evidence that this hardship will continue for a significant portion of the loan repayment period.
- You made good-faith efforts to repay the loan before filing bankruptcy (usually this means you have been in pay back for a minimum of five years).
This burden of proof is so onerous that many lawyers will not even seek bankruptcy discharge of student loans. If struggling with student loan payments but unable to get bankruptcy protections, speak to your loan servicer about your situation. Federal student loans do offer deferments, forbearances, and/or income-dependent repayment plans as options when bankruptcy is not.