Can I Get a Student Loan While in Bankruptcy?

Navigating educational funding while managing a bankruptcy is often achievable. Understanding the distinct processes and requirements for different types of student loans is important for individuals seeking to continue their education. While bankruptcy impacts financial standing, specific regulations and lending practices govern eligibility for federal and private student aid.

Federal Student Loan Eligibility During Bankruptcy

Federal student aid eligibility is generally not hindered by a bankruptcy filing. The U.S. Department of Education does not typically consider bankruptcy as a bar to receiving federal student loans, such as Direct Subsidized, Unsubsidized, or PLUS loans. This policy is rooted in the Bankruptcy Reform Act of 1994, which prevents federal agencies from denying aid solely due to a past bankruptcy. Students are still required to meet general eligibility criteria for federal student aid, including demonstrating financial need for certain programs.

The Free Application for Federal Student Aid (FAFSA) is the primary form for federal aid, and bankruptcy status typically does not impact FAFSA eligibility. While the FAFSA does not directly ask about previous bankruptcy cases, any assets or income affected by the bankruptcy proceedings would be reflected in the financial information provided. For most federal loan types, credit checks are not performed, meaning a bankruptcy on your record will not prevent eligibility.

An exception exists for PLUS loans, which include Direct PLUS Loans for graduate or professional students and Parent PLUS Loans for parents of undergraduate students. These loans require a credit check, and an adverse credit history, including a bankruptcy discharge within the past five years, can lead to denial. If denied a PLUS loan due to adverse credit, applicants may still qualify by obtaining an endorser (a type of co-signer) who does not have an adverse credit history, or by completing PLUS Credit Counseling. For dependent students whose parents are denied a PLUS loan, the student may become eligible for increased unsubsidized loan amounts.

Private Student Loan Eligibility During Bankruptcy

Obtaining private student loans after filing for bankruptcy presents more significant challenges compared to federal loans. Private lenders, which include banks and other financial institutions, operate differently than the federal government and place a strong emphasis on an applicant’s credit history and credit score. A bankruptcy filing can severely damage credit scores, potentially dropping them by hundreds of points and remaining on credit reports for seven to ten years depending on the type of bankruptcy filed. This negative mark signals higher risk to private lenders.

Given the impact on credit, it is common for private lenders to deny applications from individuals with recent bankruptcies. Even if approved, the loan terms might be less favorable, often including higher interest rates and fees, reflecting the increased risk perceived by the lender. To mitigate this risk, private lenders frequently require a creditworthy co-signer for applicants with a bankruptcy on their record. A co-signer assumes responsibility for the loan if the primary borrower defaults, providing an additional layer of security for the lender.

Lenders also consider other financial factors such as income stability and debt-to-income ratio during their underwriting process. While a bankruptcy may reflect a past financial struggle, demonstrating a stable income and a manageable debt-to-income ratio can improve an applicant’s chances. However, the discretion of private lenders is substantial, and their willingness to lend after bankruptcy varies widely. Chapter 13 bankruptcies, which involve a repayment plan, may be viewed more favorably by some private lenders than Chapter 7 liquidations.

Steps for Applying for Student Loans

Applying for federal student loans begins with completing the Free Application for Federal Student Aid (FAFSA) at studentaid.gov. Before starting, applicants should create a StudentAid.gov account, which provides an FSA ID, and gather necessary documents such as tax information and records of untaxed income. The FAFSA asks for financial details, and all contributors (e.g., students, parents, spouses) must provide their information and consent to transfer federal tax data directly into the form.

After submitting the FAFSA, applicants will receive a FAFSA Submission Summary. This summary outlines eligibility for federal aid and includes the Student Aid Index (SAI), which schools use to determine aid packages. Schools listed on the FAFSA will receive this information and subsequently send financial aid award letters detailing the types and amounts of aid offered, including grants, scholarships, and federal loans. Applicants should review these offers carefully and accept the aid they wish to receive, often by signing a Master Promissory Note for loans.

For private student loans, the application process involves researching various lenders, as eligibility criteria and terms differ. Most private lenders offer online applications, which typically require personal, financial, and enrollment information. During the application, lenders will conduct a credit check and evaluate income and existing debt to assess creditworthiness. If a co-signer is required, their financial information will also be part of the application and underwriting review. The approval timeline for private loans varies.