Will I Lose Student Loan Eligibility If I File for Bankruptcy?

A college education is a massive expense.  According to the College Board, the average cost of tuition, fees, room, and board from 2014 to 2015 was nearly $42,500 for a private four-year college.  Four-year public schools didn’t fare much better, with an average price tag of about $33,000 for out-of-state and close to $20,000 for in-state.  When faced with such a staggering bill, the overwhelming majority of students and/or parents will have to take out a loan.  But what if you have a bankruptcy in your past?  Will you lose student loan eligibility? Our Allentown bankruptcy lawyers explain some of the factors students and parents should consider.

Common Types of Student Loans

The answer to whether you’ll be disqualified for student loans depends on which type of loan you’re pursuing. Some of the most common types of student loans include:

• Perkins Loans — These are low-interest federal loans meant for low-income graduate and undergraduate students.  In 2014, Perkins loans were capped at $27,500 for undergrads and $60,000 for grad students.

• PLUS Loans — These are federal loans meant for grad students and the parents of undergraduates.  These loans come from the U.S. Department of Education, and are capped at the total cost of attendance (from which other sources of financial aid are subtracted).

• Private Loans — Private loans come from lenders like banks and credit unions.

• Stafford Loans — These are federal loans.  Subsidized Stafford loans are meant for undergrads, while graduate students must take out unsubsidized Stafford loans. Students apply for Stafford loans by completing and submitting FAFSA (Free Application for Federal Student Aid).

Perkins loans and Stafford loans are based on financial need, not credit history, which means that prior bankruptcies will not have any impact on loan eligibility.  Unfortunately, the same cannot be said of private loans and PLUS loans.

No Adverse Credit History for Private or PLUS Loans

As we discussed in an earlier article about filing for bankruptcy as a parent, PLUS loan eligibility depends on having healthy credit.  That means the borrower cannot have a history of mortgage foreclosure, wage garnishment, vehicle repossession, or Chapter 7 or Chapter 13 bankruptcy. If any of these events have occurred in the past five years, you have what is referred to as an “adverse credit history” and are prohibited by law from taking out a PLUS loan.

However, the borrower can regain eligibility once at least five years have passed since the bankruptcy or other event.  Even if fewer than five years have passed, the borrower could still potentially be eligible through an endorser with a healthy credit history (provided the endorser is not your own child).  Moreover, being denied for a PLUS loan can increase your Stafford loan by up to $5,000.  Stafford loans also have lower interest rates than PLUS loans.

Like PLUS loans, private loans are generally dependent on the borrower having a good credit history, which means past bankruptcies can pose an obstacle.  A Chapter 7 bankruptcy will remain on your record for 10 years, while a 13 bankruptcy will remain on your credit report for seven years.  The clock starts counting down from the date you initially filed, not the date you received your discharge.  (This is particularly good news for Chapter 13 debtors, as completion can take anywhere from three to five years due to its defining characteristic: the Chapter 13 repayment plan, which is absent from Chapter 7 cases.)

Also like PLUS loans, private loans may be within reach if there is a cosigner who has good credit.  The lender’s primary concern is maximizing the likelihood of repayment, so if your cosigner is steadily employed and has a history of making timely payments, the bank may be more receptive to negotiations.

Can Bankruptcy Eliminate College Tuition Debt?

Now that we’ve covered the basics of how bankruptcy impacts student loan eligibility, let’s look at the situation in reverse.  Is it possible to get rid of student loan debt by filing for bankruptcy after you graduate?

Generally speaking, the answer is no.  While bankruptcy can erase or alleviate the majority of your financial liabilities — including but not limited to significant sources of debt like credit cards and medical bills — there are a few types of debt which are generally unaffected.  In most cases, bankruptcy cannot erase debts arising from back taxes, alimony and/or child support obligations, or student loans.

However, there is one exception: undue hardship.  To determine whether undue hardship exists, the bankruptcy court will screen you with the three-pronged “Brunner Test,” which evaluates (1) your standard of living relative to the poverty line, (2) the expected prognosis for your current financial situation, and (3) whether you have made sincere and transparent “good faith” efforts to pay off your student loans to the best of your ability.

Even with the Brunner Test, there is one caveat: hardship discharges are often difficult to obtain due to their rigorous standards.  Debtors are strongly advised to seek representation from an experienced attorney, as pro se or self-representing debtors are frequently unsuccessful in their efforts to interpret the demanding and complicated rules and requirements set forth by the U.S. Bankruptcy Code.

Our Pennsylvania Bankruptcy Attorneys Can Help Relieve You of Debt

If you’re thinking about filing for Chapter 13 or Chapter 7 bankruptcy in Pennsylvania, a Philadelphia bankruptcy lawyer of Young, Marr, Mallis & Associates can help you understand your options, rights, and responsibilities.  To start discussing whether bankruptcy is right for you in a free and completely private legal consultation, call our law offices today at (215) 701-6519 in Pennsylvania.