How Will Bankruptcy Affect Student Financial Aid?

How Will Bankruptcy Affect Student Financial Aid?

August 18, 2020

Whether your child is about to go off to college, or you’re seeking higher education with a bankruptcy in your past (or present), many clients wonder how bankruptcy will affect getting student financial aid, particularly loans.

Student loan bankruptcy and financial aid in The Woodlands, TX can be a complex issue, but the short answer is that you typically should not have trouble receiving student aid, except in the case of a private loan or federal PLUS loan.

Federal student loans and grants

Generally, your credit score doesn’t matter when you’re applying for federal student aid, including loans and grants. (The only exception are PLUS loans.) When it comes to student loans, prior bankruptcy in The Woodlands, TX will not affect whether you receive federal financial aid—or rather, that cannot be the determining factor. Administrators cannot use bankruptcy as an indicator that the borrower will be unable or unwilling to repay their student loans, but schools can consider their post-bankruptcy credit history. In some cases, that may mean you need a co-signer to get the loans you need.

Federal PLUS loans

With PLUS loans, your credit history does matter. PLUS loans can be taken out by parents for students in undergrad, or they can be taken out directly by students for graduate school. You must pass a credit check, and will be denied if you have an “adverse credit history.” That includes black marks like bankruptcy, repossessions, tax liens, foreclosures, 90-day delinquent accounts and defaulting. Some, like bankruptcy and tax liens, have a five-year limit. Others will work against you forever.

However, that is not necessarily a complete bar to getting PLUS loans—sometimes your application will be granted if you can show that you experienced extenuating circumstances. For those considering their options for this or other academic school years, COVID-19-related financial issues will likely qualify as extenuating circumstances.

Private student loans

Finally, private student loans are always an option, but they come with pitfalls of their own—including the fact that you’ll need to pass a credit check. Many people turn to private loans because federal aid cannot cover the full amount.

If you’ve had a bankruptcy in the last 10 years (which is how long it takes before it’s removed from your credit report), that will work against you. That’s because private lenders, such as banks and other financial institutions, depend on being paid back in order to survive. The lower your credit score, the less likely you’ll qualify for a private student loan. If you do qualify with a bankruptcy or low credit score, it will probably come with higher fees and interest than for a borrower with great credit.

Just like with PLUS loans, however, bankruptcy doesn’t have to be an absolute bar to getting private student loans. If you can show that you’ve worked to rebuild your credit, some banks will find that a compelling reason to offer you a loan.

To discuss your bankruptcy and student loan debt in The Woodlands, TX, call James R. Jones, Attorney at Law today.

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