With rising living expenses and decreasing income, more and more students are relying on financial aid to pay for school. Families in debt and contemplating bankruptcy will always ask, “How will bankruptcy affect my ability to take out student loans?” The easy answer is it shouldn’t – but like everything involving bankruptcy it’s never that easy.
Generally speaking, a bankruptcy should have no affect on the eligibility for a federal loan. Federal loans include Unsubsidized Federal Stafford Loan, Federal Pell Grants, Federal Perkins Loans, Federal Supplement Education Opportunity Grant, Federal PLUS Loans. These loans cannot be denied to a student based solely on a bankruptcy filing. Administrators cannot cite bankruptcy as a reason for denial but schools can use past payment history in determining willingness to repay the loan.
If you are a parent and apply for a PLUS loan – a bankruptcy could affect your ability to take out a PLUS loan. The reason for denial could be an adverse credit history (and the debts you discharged through bankruptcy) within the last five years. A parent could be eligible with a co-signer and a child could still be eligible for an increased unsubsidized loan.
Private student loans are different and more costly. Most private student loan programs examine credit history within the last ten years and a bankruptcy discharge can disqualify someone from a private student loan. These loans do not have a fixed interest rate on repayment like federal loans. The interest paid on private student loans is based on credit score and if your score is below 650 you will probably not be approved.
Increasing your credit score 30-50 points can improve your application and subsequent interest rate on private student loans. If someone has unsecured debt and a poor payment history, filing a bankruptcy and then reestablishing credit post-bankruptcy could improve ability to take on student loan debt.
So after bankruptcy, make payments on time to reestablish your credit. Bankruptcy is not the reason for denial – your payment history is. This is the same with future purchases like a home loan or a car loan. Loan servicers (including home and car financers) want to see a willingness to pay back debt. Like any major loan, your creditors want to see you are worth the risk. This is why payment history is the biggest contributor to your credit score and your student loan eligibility.
Use your bankruptcy as a reset button. Budgeting and saving money will help your future financial decisions. Your bankruptcy filing is not an excuse for poor credit. It is an aid to helping you reestablish and rebuild.