How Does Bankruptcy Affect Eligibility for Student Financial Aid?

How Does Bankruptcy Affect Eligibility for Student Financial Aid?

How does a chapter 13 chapter have an effect on monetary help? Would or not it’s
troublesome to get monetary help for my little one as a result of my husband and I
filed chapter 13 about 2 years in the past?
— C. F.

A earlier chapter can have an effect on eligibility for some training loans

but it surely doesn’t have an effect on eligibility for different types of monetary help.

The Bankruptcy Reform Act of 1994 (P.L. 103-394) amended the US
Bankruptcy Code at 11 USC 525(c) to ban denial of
authorities student grants and loans primarily based solely on the student’s or
borrower’s previous or current submitting of a chapter petition. The solely

exception is the Federal PLUS loan.

A toddler is eligible for federal student loans, such because the Stafford
loan, whatever the mother or father’s historical past of chapter. The Stafford
loan doesn’t depend upon the borrower’s credit historical past in any method.

A mother or father’s historical past of chapter additionally doesn’t have an effect on the kid’s
eligibility for federal grants, state grants, scholarships and cash
from the faculty, nor student employment applications like Federal
Work-Study. The mother or father might also be eligible for tuition installment
plans as a result of these plans are often structured as a professional
training loan to make them troublesome to discharge in chapter.

However, mother and father are ineligible to borrow from the PLUS loan
program for 5 years from the date of the chapter discharge. (By
legislation, PLUS loan debtors should not have an opposed credit historical past. The
rules outline an opposed credit historical past as having had a
chapter discharge, foreclosures, repossession, tax lien, wage
garnishment or default dedication within the final 5 years or a
present delinquency on any debt of 90 or extra days.)

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If a toddler’s mother or father is denied a PLUS loan due to an
opposed credit historical past, the kid turns into eligible for elevated
unsubsidized Stafford loan limits. The unsubsidized Stafford loan
limits are elevated by $4,000 per 12 months through the freshman and
sophomore years and $5,000 per 12 months through the junior and senior years. Some
households want the extra unsubsidized Stafford loan eligibility
as a result of the unsubsidized Stafford loan has a set 6.8% rate of interest,
which is decrease than the 7.9% rate of interest on the PLUS loan.

(A earlier Ask Kantro column,
How does chapter have an effect on PLUS loan eligibility,
explains why a PLUS loan denial due to a previous chapter doesn’t
violate the Bankruptcy Reform Act of 1994.)

Parents who’ve been denied a PLUS loan due to an opposed credit
historical past can nonetheless get hold of a PLUS loan with an endorser (cosigner) who
doesn’t have an opposed credit historical past. The endorser have to be somebody
apart from the dependent student for whom the PLUS loan is
borrowed. Parents may enchantment an opposed credit historical past
dedication to the US Department of Education by documenting
extenuating circumstances. (The extenuating circumstances should apply
to the mother and father, not the endorser.) The US Department of Education seems to
typically think about a chapter 13 conversion of a chapter 7, 11 or 12
chapter to be ample grounds for granting such an enchantment.

Parents with a current chapter will probably be ineligible to function the
borrower or cosigner on most personal student loans. The provisions of
the Bankruptcy Reform Act of 1994 apply solely to federal student loans,
not personal student loans. Most lenders of personal student loans ask
about chapter filings within the final 7 or 10 years. It actually does not
matter whether or not the submitting was beneath chapter 7, 11, 12 or 13, because the
lenders will probably be cautious of lending cash to anyone with a current
chapter submitting.

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Parents who’ve had a chapter also needs to ask the faculty’s
monetary help workplace for knowledgeable judgment evaluation. College
monetary help directors are break up on whether or not to make changes
to revenue for obligatory court-ordered month-to-month funds to the
chapter trustee. Some do, most do not. The enchantment ought to point out any
extenuating circumstances, particularly points of the scenario that
had been past the mother or father’s management (e.g., chapter due to medical
payments or a pure catastrophe, or if the debtor was pressured into
chapter involuntarily by collectors). The Higher Education Act of
1965 permits monetary help directors to exclude from revenue the
proceeds of the sale of a farm or enterprise asset if the sale outcomes
from a “voluntary or involuntary foreclosures, forfeiture, or
chapter or an involuntary liquidation.”