Bankruptcy: Borrowing for College Tuition 101

Tuesday , 24, September 2013 Comments Off on Bankruptcy: Borrowing for College Tuition 101

In most cases a bankruptcy should have no impact on eligibility for federal student aid. Title IV grant or loan aid (including the Perkins loan program) will not be denied an applying student who has filed bankruptcy exclusively on the record of their past Bankruptcy. Financial aid administrators are not permitted to use a former bankruptcy to substantiate an unwillingness to repay student loans. Schools will however continue to consider the student’s post-bankruptcy credit history in assessing an applicant’s willingness to repay the loan.

If the applicant’s have been fiscally responsible post-bankruptcy and there are no delinquencies or defaults on student loans currently in repayment, the student should be eligible for additional federal student loans. If the student federal student loans are in default and were not included in a bankruptcy, the student will not be able to get further federal student aid until he/ she resolves the problem. If the loan was discharged in bankruptcy after the borrower defaulted on the loan, it is no longer considered to be in default. Getting a student loan discharged in bankruptcy is no easy task. The party filing bankruptcy would have to meet the very high threshold of Bankruptcy law which only allows a discharge of a student loan if having to pay it will create an undue hardship. Unfortunately, that’s a pretty tough standard to overcome. Courts have considered this to mean showing that  you can’t provide a minimum standard of living for yourself and your dependents if you have to repay the loan.

What about the Parents who apply for a PLUS loan (or graduate students applying for a Grad PLUS loan)? Here the rules are different. Parents can be denied a PLUS loan if they have an adverse credit history; adverse credit history includes having had debts discharged in bankruptcy within the past five years. If this is the case, the parents may still be eligible for a PLUS loan if they have a cosigner without an adverse credit history. All hope is not lost however, because if the parents are turned down for a PLUS loan because of an adverse credit history, the student may be eligible for an increased unsubsidized Stafford loan.

The anti-discrimination rules appear in 11 USC 525(c):

1. A governmental unit that operates a student grant or loan program and a person engaged in a business that includes the making of loans guaranteed or insured under a student loan program may not deny a student grant, loan, loan guarantee, or loan insurance to a person that is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, or another person with whom the debtor or bankrupt has been associated, because the debtor or bankrupt is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of a case under this title or during the pendency of the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act. 2. In this section, “student loan program” means any program operated under title IV of the Higher Education Act of 1965 or a similar program operated under State or local law.

Private loans are not governed by the same set of rules. Most bankruptcies will have an impact on eligibility for private loan programs. Many private loan programs, including school loan programs, have credit criterion that disqualify people with a bankruptcy within the past 7 or 10 years from borrowing without a cosigner with better credit. If a parent went through bankruptcy, it generally will have zero no impact on their children’s eligibility for private loans, unless of course the child needs the parents to cosign the loans. Remember bankruptcy, when used for the right purposes, is not about punishment it is about forgiveness.

The New Jersey personal bankruptcy attorneys at Riviere Cresci & Singer LLC can answer any questions you may have concerning bankruptcy in relation to your future plans, or any general bankruptcy questions. If you live in New Jersey, including Hazlet, Keansburg, Tinton Falls, Millstone Township, and Neptune City, call us for a free consultation to find out how we can help you.