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Student Loans and Bankruptcy

Francine L. Huff
LoanBiz Columnist

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Filing for bankruptcy should be a person's last resort if they're having major financial problems. But taking this step can help erase or reduce unpaid debts in some cases. Here are some things people who have filed or plan to file for bankruptcy need to know about how student loans and future financial aid may be impacted.

 

Student Loans Usually Won't Be Discharged

Federal student loans such as the Stafford or PLUS are discharged if someone files for bankruptcy. That includes loans taken out by students or their parents to help pay for higher education costs. Private student loans made through nonprofits also won't be discharged.

 

However, there is an exception to the rule. Borrowers can file a petition during bankruptcy proceedings to have student loans discharged if they can prove that paying them back causes undue financial hardship. That means the person filing for bankruptcy must prove that:

 

  • They can't make student loan payments and keep up the most basic standard of living
  • They will remain in such poor financial shape for most of the student loan repayment period due to circumstances such as a disability or mental illness
  • They have made all possible efforts to repay their student loans

 

Qualifying for New Loans

People who have already had student loans discharged in a bankruptcy can still apply for financial aid. Depending upon their situation they may be eligible for federal student loans, grants, and work study. Borrowers must meet all other financial aid requirements. However, if they are in default on previous student loans, they cannot qualify and need to work out a repayment plan with lenders before they are eligible for federal student loans and other aid. Parents who have a bankruptcy in their credit history may be denied a PLUS loan.

 

Private student loans may be more difficult to qualify for after a bankruptcy filing. Many of those loan programs stipulate that borrowers who have filed for bankruptcy within the past seven to 10 years must have a co-signer with good credit. However, people who were forced to file for bankruptcy due to circumstances beyond their control, such as a natural disaster, may be able to qualify for a private student loan.

 

It's important for students who have a bankruptcy in their credit history to discuss their options for funding with the financial aid office of any schools where they plan to apply.

 

Sources

FinAid


About the Author
Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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