While bankruptcy is never one’s life goals, the fact is it happens. Job loss, medical expenses, divorce, and life’s other financial twists and turns can lead folks who never imagined doing so to file for bankruptcy protection. Bankruptcy filings have been steadily on the rise over the past century, especially since the 1980s, with close to a million consumers seeking bankruptcy protection in 2014. With the massive financial investment that comes with college, it is no surprise that as a college finance educator, I often get questions from parents and students about bankruptcy’s effect on college financial aid. Here are the 3 most common questions I receive about bankruptcy and financial aid:
Will my bankruptcy affect my child’s financial aid eligibility?
In short, no. Federal, state, and college-based student aid is not affected by a parent’s prior bankruptcy. A student’s grants and scholarships are neither increased nor decreased due to a parent’s bankruptcy, and he or she can still borrow his federal entitlement of $5,500-$7,500 annually in Direct Stafford Loans.
So while your bankruptcy will not, by default, 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 ability to secure parent loans to help pay your family’s share of college costs (see next question), you could request special consideration for additional grants or institutional loans to help bridge your gap in funding.
I have a bankruptcy in my past. Will I be able to borrow loans to pay for my child’s college?
Depending upon how far removed you are from the bankruptcy, it may prove difficult to secure adequate parent loan funding. The most commonly borrowed (and easily accessed) parent education loan is the Direct PLUS Loan. The PLUS Loan credit check searches for adverse credit, including bankruptcy, within the past 5 years. If your bankruptcy falls within that 5-year time frame, your application for credit will 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 borrow an additional $4,000-$5,000 Unsubsidized Direct Loan in his or her name.
Can my student loans be discharged in bankruptcy?
Probably not. It is extremely difficult, though not impossible, to have your student loans discharged in bankruptcy. In order to have your loans discharged, you must be able to prove to the court that repayment of your 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 criteria of the following 3-pronged test:
- If you are forced to repay the loan, you would not be able 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 repayment for a minimum of five years).
This burden of proof is so onerous that many attorneys will not even seek bankruptcy discharge of student loans. If struggling with student loan payments but unable to obtain 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.