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Bankruptcy Issues

A past or current bankruptcy normally has no impact on a student's future eligibility for federal grant, loan, and work assistance.  In addition, federal grant or loan aid cannot be denied to a student solely due to a bankruptcy (as long as the student is not currently in default on a previously received federal loan). This is because a student's credit history is never checked as part of determining his/her eligibility for federal student assistance. Further, if a student's federal loan is discharged in bankruptcy after (s)he defaults, the loan is no longer considered to be in default (and no further payments are required).

Federal student loans, however, are rarely discharged in bankruptcy and only if the student petitions (and can prove) that repayment will cause an extreme financial hardship. Also, federal student loans have no statute of limitations. Delinquent loan payments and loan defaults can impact a student's credit rating for a minimum of 7 years.

On the other hand, a parent who applies for Federal PLUS Loan funds is usually denied if (s)he has an adverse credit history, one definition of which is having had debts discharged in bankruptcy within the past 5 years.

A student with an adverse credit history due to a bankruptcy will usually be denied private educational loan funds by most lending organizations. However, the student may be allowed to receive a private educational loan if (s)he has a credit-worthy co-signer. A parent's bankruptcy or adverse credit history normally has no impact on a student's eligibility for private loans. Also, the U.S. Bankruptcy Code states that if certain private loans can be proven to be education-related (similar to the treatment of federal student loans) these private loans are not required to be discharged during a bankruptcy filing.

Click here for additional information about the relationship between bankruptcy and financial aid.