When it comes to obtaining a parent student loan after having declared bankruptcy, there is a downside being that a bankruptcy discharge during the previous five years likely precludes the parent from obtaining a PLUS loan for the child.
There is one certainty for every person who files bankruptcy: Life Goes On but the question is How will filing bankruptcy affect my eligibility to obtain parent loans for college?
When a debtor has college-age children, on-going tasks may include educational contributions and student loans.
The federal Parent Loans for Undergraduate Students (PLUS) program enables parents to borrow money for each dependent undergraduate student enrolled in school at least half-time.
The PLUS loan program is a credit-based loan which means the borrower must pass a credit check that is performed by the lender.
Section 428B(a)(1)(A) of the Higher Education Act of 1965 [20 USC 1078-2(a)(1)(A)] provides guidelines for PLUS loan borrowers. This section states that borrowers may not have an adverse credit history, which is defined by regulations at 34 CFR 682.201(c)(2) and 34 CFR 685.200(c)(1)(B) as including “bankruptcy discharge” – during the five years preceding the date of the credit report.”
A bankruptcy discharge during the previous five years likely precludes the parent from obtaining a PLUS loan for the child.
However, a Federal PLUS loan denial is not based solely on a bankruptcy discharge. Unlike some state sponsored loan programs that require borrowers to have no previous bankruptcies, the Department of Education’s guidelines do not run afoul of bankruptcy anti-discrimination laws.
The existence of a bankruptcy discharge within five years can be overcome by other evidence of credit-worthiness. A parent borrower may also qualify for a PLUS loan with a credit worthy co-signor.
The mechanics of obtaining a PLUS loan with a history of bankruptcy also depends on the bankruptcy chapter of the debtor:
A Chapter 7 bankruptcy is generally discharged within four to five months. After the debtor’s Chapter 7 discharge, the five year “look-back” period begins to run. However, a Chapter 7 debtor may be able to rebuild his credit and improve his credit score tremendously within two years after the bankruptcy discharge. An above-average credit score and a record of responsible use of credit since the bankruptcy discharge may overcome the adverse event of bankruptcy.
Interestingly, it is the bankruptcy discharge and not the bankruptcy filing that is included in the federal description of adverse credit history. Consequently, many Chapter 13 debtors are approved for PLUS loans when they apply during bankruptcy.
The problem for a debtor in an open Chapter 13 case is obtaining bankruptcy court approval to incur the debt.
Chapter 13 debtors are expressly prohibited from using credit during the bankruptcy without prior permission from the court. Most bankruptcy courts evaluate this permission in terms of advantage to creditors and to the bankruptcy estate. Advantage to the debtor or his children is not a reason for using credit.
Likewise, the court will not permit the debtor to contribute to a dependent’s education during the Chapter 13 repayment period using property of the bankruptcy estate (which includes the debtor’s wages). Since repayment of PLUS loans begin 60 days after the final disbursement, the chances of obtaining court permission to obtain a PLUS loan are unlikely.
If a dependent student’s parents are precluded from obtaining a Parent PLUS loan, the student becomes eligible for the higher un-subsidized Stafford loan limits available to independent students.
On the other hand, if the student is determined to be independent, the financial aid opportunities become greater, since the aid eligibility for an independent student is based on the student’s own income, which is usually quite low, rather than parents’ income, which is often much higher.
This can mean qualifying for grants, which do not need to be repaid, rather than student loans.
The Department of Education guidelines for determining independent status are very strict.
To qualify for independent status, the student must either (1) reached the age of 24; (2) be married; (2) be enrolled in a graduate or professional course of study; (4) enlist in the military or achieve veteran status; (5) be an orphan, a ward of the court, or an emancipated minor; (6) have a child or other legal dependent other than a spouse; or (7) either be homeless or at risk of becoming homeless.
The Department’s regulations assume that a student under the age of 24 and not otherwise deemed independent will receive educational contributions from their parents.
But what if the student’s parents are in Chapter 13 bankruptcy and the bankruptcy court forbids the parents from contributing to the student’s education?
While the Department of Education does not have a rule or regulation that makes a student independent when his or her parents file a Chapter 13 bankruptcy case, it allows the individual school to use “professional judgment” as to whether or not a student will qualify as independent while the parents are in bankruptcy.
The process is to appeal the financial aid decision and submit the court order prohibiting the debtor from incurring debt during the bankruptcy case. The school may require additional paperwork, such as the parent’s tax return, the child’s tax return, and a letter from the debtor’s attorney.
A successful appeal could mean additional funds including eligibility for federal grants or unsubsidized loans. Your best bet in cases like this is to contact the school’s financial aid officer for more details on the appeals process.