How Does My Bankruptcy Affect My College Student’s Financial Aid?
If you have a child who is finishing high school and about to enter college, it can be an exciting time for everyone in the family. As a parent, however, you may be feeling some degree of nervousness about the expenses associated with your college student’s tuition and fees. If you have significant outstanding debt or if you have filed for bankruptcy in recent years, you are likely to be worried about how your financial history will affect your child’s financial aid.
Bankruptcy has consequences for many areas of a person’s life. Fortunately, however, it only has a specific and limited impact on your child’s chances of being eligible for some student loans and loan programs.
Scholarships, Grants, and Federal Loans
First, some positive news: your credit history will have absolutely no impact on your child’s eligibility for scholarships from the college or from private funders. Nor will it affect your child’s chances of securing federal or state grants or their enrollment in student employment programs, such as Federal Work-Study.
There is also some good news when it comes to federal student loans. Even if a parent has bad credit or a past or present bankruptcy, their child will still be eligible for federal student loans. One example is the Stafford loan, which requires no credit check and thus does not depend in any way on the borrower’s credit history. This is because the Bankruptcy Reform Act of 1994 changed the U.S. Bankruptcy Code to ensure that the government could not deny Federal student grants and loans based on the student or borrower having filed a bankruptcy.
There is, however, one exception to this rule.
Direct (parent) PLUS loans can still be denied based on a borrower’s credit history. PLUS loans are federal loans that parents apply for to help their dependent undergraduate students pay for college. The lender for these loans is the U.S. Department of Education, and they conduct credit checks. For this reason, if you have an adverse credit history, you will be ineligible for this particular loan.
“Adverse credit history” can mean that you have had any of the following in the last five years:
- Bankruptcy discharge
- Tax lien
- Wage garnishment
- Default determination
In the case of a bankruptcy discharge, a parent will remain ineligible for five years from the date on which it occurred.
Additionally, if you have a current delinquency of 90 days or more on any debt, you will be ineligible to receive a PLUS loan.
The Silver Lining
If you are denied a PLUS loan due to your adverse credit history, your child will become eligible for an increased limit on unsubsidized Stafford loans. This means that, during the child’s freshman and sophomore years, the loan limit will increase by $4000 per year. In their junior and senior years, the increase will be $5000. In fact, some people prefer this option to the PLUS loan due to the lower (and fixed) interest rate of the Stafford loan.
Furthermore, if your child is a graduate or a professional student, they also have the option of filing for a grad PLUS loan on their own. This means that your credit history as a parent would have no bearing on your child’s eligibility.
While it’s understandable to have concerns about how your own credit history will affect your child’s chances of receiving loans for the education they deserve, their options are not severely limited, even if you have filed for bankruptcy in recent years. Their limits for some options (such as unsubsidized Stafford loans) may even increase if you have an adverse credit history.
The variables can certainly be complicated, but a conversation with a trusted bankruptcy attorney can help you feel much better informed about your child’s range of options.
Contact an Experienced Raleigh Bankruptcy Attorney Today
If you are struggling with how your financial situation might affect your child’s access to a college education, you do not have to face these challenges alone. The seasoned Raleigh bankruptcy lawyers of Bradford Law Offices, PLLC are passionate about assisting North Carolina residents who are going through difficult financial moments in their lives. We recognize the uniqueness of each of our clients’ situations, and we will use our experience and knowledge to help you regain control over your financial situation.
If you would like to find out how we can help, call us today at (919) 758-8879 for a confidential consultation. We are here for you.