Filing bankruptcy is seldom the first choice for getting out of debt. The bankruptcy court system seems daunting to most people. The financial system has spent billions of dollars convincing people that bankruptcy is immoral, unethical, dishonest, and causes irreparable damage to someone’s economic prospects.
Many people worry about their ability to get a mortgage, car loan, or new credit cards after bankruptcy. However, of far greater concern is whether filing bankruptcy will negatively impact your ability to finance higher education for yourself or your children.
Will you be able to get student loans after bankruptcy, and under what circumstances? Is there anything you can do to maximize your chance of approval? Do your only options involve raiding your retirement accounts, home equity, or begging family and friends for help?
Thankfully, all hope is not lost. Not only will bankruptcy not prevent you from getting student loans, but other options also remain available to help you finance your higher education.
How Bankruptcy Affects Student Loan Eligibility
Bankruptcy will not affect your ability to get most types of federal student loans. You may, however, have difficulty getting a federal PLUS Loan immediately after bankruptcy, as these are the only credit-based federal student loans.
The rules for private student loans vary depending on the lender. Banks make lending decisions based on individual underwriting criteria and aren’t subject to federal regulations regarding educational debts.
Check Your Credit Report
If you’re planning on applying for a credit-based student loan, you should ensure that your credit report is accurate. Errors can disqualify you from the best rates and terms. In addition, a good credit score will help you get approved for loans at lower interest rates and save money over time.
To ensure accuracy, get copies of your credit reports from each major reporting agency (Equifax, Experian, and TransUnion). Make sure that all information listed is correct and up-to-date.
If you find an error on your credit report, contact the creditor or agency that provided the information immediately.
Look for Scholarships
Scholarships are free money, but many think only students with excellent grades or test scores can qualify. However, plenty of scholarships don’t require stellar academic records.
Organizations, government agencies, private companies, and community groups offer scholarships with various criteria, so it’s essential to look at many options. Start by contacting your school’s financial aid office to ask about available resources, then search the online scholarship databases.
Complete your FAFSA and Review Your Student Aid Report
The Free Application for Federal Student Aid (FAFSA) is the first step to securing financial aid for college. The form collects information about your family’s finances, determines how much grant money you can get, and helps your college determine how much money you can contribute toward your education.
You can fill out the FAFSA online anytime between October 1 and March 2 of the year you plan to attend school.
Once you’ve completed your FAFSA, review your Student Aid Report (SAR). This document shows how much money you can borrow from federal student loans and how much you may be eligible for in other types of financial aid, including grants, scholarships, and work-study programs.
Your college will use the FAFSA to determine your “Expected Family Contribution” (EFC), the amount your family should be able to contribute toward your education based on your income, assets, and family size. Your EFC determines eligibility for all forms of federal student aid — grants, loans, and work-study.
Negotiate for More Financial Aid
Your college might be willing to increase your financial aid. Unless you ask, however, you’ll never know.
Contact your college to ask about merit scholarships or other monetary awards available. If you received offers from other schools, see if your college will match or beat them.
Always be mindful of any deadlines for accepting scholarships and awards. Money is often offered on a “first come, first served” basis, and you don’t want to lose that financial support.
Consider Private Student Loans
Private student loans have higher interest rates, fewer repayment options, and none of the forgiveness programs offered by their federal counterparts. For that reason, they should be your last resort.
Check with your school’s financial aid office to see if they have any recommendations. In addition, many colleges and universities partner with specific lenders so that students can borrow directly through their school rather than applying on their own.
If your institution doesn’t have an established relationship with any particular lender, compare interest rates and terms from several companies before picking one. Take the time to do some research, as it could save you a lot of money.
Beware the Private Student Loan Cosigner Trap
A cosigner is a co-borrower who agrees to share financial responsibility for a loan. The cosigner and primary borrower are 100% legally liable for repayment, which means a cosigner can help a borrower get a better interest rate or lower monthly payments.
Most private student loans require a cosigner because the borrower typically doesn’t have enough credit history or an income to repay the debt. Because the cosigner is equally responsible for the debt, their credit will be affected by a failure to make payments on time.
Start Paying While You’re in School
Though it may be challenging to find the money to make payments while you’re still in school, it’s worth it.
Private student loans, Stafford Unsubsidized, and PLUS Loans start accruing interest immediately. In addition, the loan capitalizes when you enter repayment, adding accrued interest to the principal balance and tens of thousands of dollars in extra finance charges over the life of the loan. As a result, you can quickly bring down the balance and save yourself a significant amount of money by repaying the loans before they enter repayment.
Your credit score will also improve by making payments on time each month, even if those payments are small. In addition, this positive payment history will make it easier to get approved for other types of credit more quickly.
Bankruptcy Won’t End Your Educational Journey
Though bankruptcy won’t hurt your chances of getting most types of federal student loans, you may have some short-term difficulty qualifying for Graduate PLUS Loans or private student loans. However, by planning and remaining vigilant, there’s no reason why bankruptcy should serve to slam shut the doors of higher education.
ABOUT THE AUTHOR
Meet Jay
Since I became a lawyer in 1995, I’ve represented people with problems involving student loans, consumer debts, mortgage foreclosures, collection abuse, and credit reports. Instead of gatekeeping my knowledge, I make as much of it available at no cost as possible on this site and my other social channels. I wrote every word on this site.
I’ve helped thousands of federal and private student loan borrowers lower their payments, negotiate settlements, get out of default and qualify for loan forgiveness programs. My practice includes defending student loan lawsuits filed by companies such as Navient and National Collegiate Student Loan Trust. In addition, I’ve represented thousands of individuals and families in Chapter 7 and Chapter 13 bankruptcy cases. I currently focus my law practice solely on student loan issues.
I played a central role in developing the Student Loan Law Workshop, where I helped to train over 350 lawyers on how to help people with student loan problems. I’ve spoken at events held by the National Association of Consumer Bankruptcy Attorneys, National Association of Consumer Advocates, and bar associations around the country. National news outlets regularly look to me for my insights on student loans and consumer debt issues.
I’m licensed to practice law in New York and California and advise federal student loan borrowers nationwide.
