Bankruptcy is never good for your credit, and there are circumstances where a student loan can depend on your credit standing. The good news is that in most situations, a bankruptcy filing will not get in the way of a loan. However, if the loan requires a credit check, a past bankruptcy will be a problem.
Debt Relief Options
If you just can't pay your bills, you may seek financial relief by filing either for Chapter 7 or Chapter 13 bankruptcy. A Chapter 7 bankruptcy discharges your debts, which means most of your financial obligations disappear. However, that doesn't usually apply to a student loan. Chapter 13 reorganizes debts but does not discharge them. You settle your financial obligations through a monthly payment plan. With Chapter 13, you often pay a reduced proportion of your debts.
Guaranteed Stafford Loans
Subsidized Stafford loans are guaranteed by the federal government and are awarded based on need. The interest on subsidized Stafford loans is waived while you're in school and during a grace period immediately after you leave school. Unsubsidized Stafford loans are also guaranteed by the federal government, but are not awarded based on need. The interest payment is not waived, but you can have the interest capitalized, or added to the principal, while you are enrolled or during the grace period if you don't want to make interest payments. There is no credit check for Stafford loans, which means bankruptcy has no effect on your eligibility.
Graduate students and parents of dependent undergraduate students may be eligible for PLUS loans, which are guaranteed by the federal government. Parents of independent undergraduate students, that is, students who do not receive a majority of their financial support from their parents, are not eligible to borrow PLUS loans. PLUS loans are not based on need, but borrowers must pass a credit check or show extenuating circumstances for derogatory credit items. Filing for bankruptcy within five years of your application usually makes you ineligible to get a PLUS loan.
Since bankruptcy stays on your credit report for up to 10 years, it will present the greatest challenge if you're trying to get a private student loan. Private lenders will run a credit check, just as they would if you were buying a house or a car. However, some lenders will grant you some leeway if you can show extenuating circumstances, plus a good payment history after the bankruptcy filing.
- Student Aid on the Web: Direct Stafford Loans
- Student Aid on the Web: Direct PLUS Loans for Graduate and Professional Degree Students
- Student Aid on the Web: Direct PLUS Loans for Parents
- Student Aid on the Web: Am I Dependent or Independent?
- FinAid: Bankruptcy and Financial Aid
- FinAid: Student Loans
Chris Blank is an independent writer and research consultant with more than 20 years' experience. Blank specializes in social policy analysis, current events, popular culture and travel. His work has appeared both online and in print publications. He holds a Master of Arts in sociology and a Juris Doctor.