A student's options when applying for student loans may be limited if his parents declared bankruptcy, particularly when a co-signer is required or it is the parent applying for the loan. Before making any decisions regarding loans, a student or interested parents should contact the school's financial aid office to learn more about specific loans, grants or scholarships available. Even with parents who declared bankruptcy, a student has ways to obtain both federal and private student loans.
The Free Application for Federal Student Aid is a form that students, or prospective students, must fill out to apply for federal student loans, grants and work-study funds. A student must complete the FAFSA to avoid passing up potential sources of financial aid, regardless of the parent's financial situation. In completing the form, the applicant must disclose financial information, including federal tax information and any untaxed income. Generally, whether parents have declared bankruptcy will not affect a student's ability to receive federal loans; however, it can hinder the parent's ability to obtain PLUS loans or cosign on a private loan.
Undergraduate students are generally eligible for Stafford loans, which are either subsidized or unsubsidized and loaned at a fixed interest rate. Subsidized Stafford loans do not accumulate interest as long as the student is enrolled at least half time in school. Unsubsidized loans will accumulate interest while in school. In order to be eligible for federal student loans, an applicant must be a U.S. citizen or national, U.S. permanent resident or eligible noncitizen. An applicant must also have submitted the FAFSA, have a financial need for subsidized Stafford loans and enrolled at least half time. A student who is considered a dependent of her parents is limited to $5,500 in her first year, $6,500 in her second year and $7,500 in the third year and beyond. An independent student is eligible for more.
Pell Grants are awarded by the federal government and are unlike loans in that the borrower does not have to pay them back. The program provides grants to low-income undergraduate students and some graduate students. Again, those applying for a Pell Grant must complete the FAFSA. Whether an applicant receives an award depends on financial need, cost of schooling, status as a full-time or part-time student and whether the student attends for a full school year.
A PLUS loan is a type of federal loan available to graduate students and parents of dependent undergraduate students. A bankruptcy, or adverse credit history in general, may affect a parent's chances of obtaining a PLUS loan for their dependent undergraduate student. In circumstances where a parent is not eligible for a PLUS loan, the student is eligible for an additional $5,000 in unsubsidized federal loans. For graduate students, the applicant for the loan is the student herself as opposed to the parent, so having parents that declared bankruptcy will not prevent the student from obtaining PLUS loans.
Read More: When Did Laws Go Into Effect Preventing Bankruptcy of Student Loans?
When federal loans are insufficient and more funds are required for school, a student may turn to private student loans. Typically, a parent will have to co-sign for private loans because it is unlikely a student will qualify on his own unless he has an established credit history or collateral. Even with a parent co-signing for the loan, the student may not be eligible if the parent declared bankruptcy. An alternative option is to find someone other than the parent to cosign for the loan.
Mark Vansetti is a licensed attorney and, along with his Juris Doctor, holds bachelor's degrees in both human biology and economics. Throughout his professional career, he has written on a variety of topics for the American Bar Association Health Law Section, FindLaw and other websites. Vansetti also served as the senior editor of his law school's law review.