One of the questions I occasionally hear from people considering bankruptcy is:

“If I file bankruptcy, will I still be able to get student loans?”

This is an important question, particularly for parents who are helping a child pay for college, students who are already in school, or someone who is considering going back to school after a bankruptcy.

The short answer is yes, you can generally still qualify for federal student aid after filing bankruptcy. A bankruptcy filing, by itself, does not make you permanently ineligible for federal student loans or other federal student aid.

However, there are some important exceptions—particularly when we are talking about Parent PLUS Loans and existing student-loan defaults.

Bankruptcy Does Not Automatically Prevent You From Receiving Federal Student Aid

Federal law generally prohibits the Department of Education and schools participating in federal student-aid programs from denying Title IV federal financial assistance solely because you filed bankruptcy or had a debt discharged in bankruptcy.

This is an important distinction.

A person who files Chapter 7 bankruptcy may have a bankruptcy notation on his or her credit report. That does not mean the person is automatically prohibited from obtaining a new federal student loan.

In other words, filing bankruptcy is not the same thing as being permanently disqualified from student loans.

There are, however, other eligibility requirements that still have to be satisfied.

What If You Already Have Student Loans When You File Bankruptcy?

This is where the situation becomes more complicated.

Student loans are treated differently from most credit-card debt, medical bills and other unsecured debts in bankruptcy. A bankruptcy discharge generally does not automatically eliminate federal student-loan debt. A borrower seeking to discharge qualifying student-loan debt generally needs a determination that repayment would impose an undue hardship.

But the fact that you have student loans when you file bankruptcy does not necessarily prevent you from receiving additional federal student aid.

The federal student-aid rules make an important distinction between simply having a student loan and being in default on a qualifying federal student loan.

Federal Student Aid explains that a borrower who has a non-defaulted federal student loan included in an active bankruptcy case can remain eligible for federal aid, provided the borrower does not otherwise have a default that makes him or her ineligible.

The Problem Is Often Default—Not Bankruptcy

This is an important point for anyone considering bankruptcy.

If you are already in default on a federal student loan, the default itself can interfere with your ability to receive additional federal student aid.

Federal Student Aid currently explains that a federal student loan generally goes into default after at least 270 days without the required payments, and a default can result in loss of eligibility for additional federal student aid.

Therefore, a person might say:

“I can’t get another student loan because I filed bankruptcy.”

That may not actually be the reason.

The problem may instead be an existing defaulted federal student loan.

There are procedures for getting out of default, including rehabilitation and consolidation, and the particular circumstances of the borrower matter.

Parent PLUS Loans Are Different

This is probably the most important exception to understand.

If you are a parent applying for a Federal Direct PLUS Loan to help pay your child’s college expenses, your credit history can be considered.

The Department of Education currently identifies a recent bankruptcy discharge as one of the circumstances that can result in an “adverse credit history” for purposes of a PLUS Loan.

That does not necessarily mean that a bankruptcy makes a Parent PLUS Loan impossible.

A person who receives an adverse credit determination may, depending upon the circumstances, have options such as:

• obtaining an eligible endorser;
• appealing the adverse credit determination based upon qualifying circumstances; or
• completing the required PLUS credit counseling where applicable.

This is why I would not tell a client simply, “You won’t be able to get student loans after bankruptcy.”

That is much too broad.

The type of student loan matters.

Federal Student Loans and Private Student Loans Are Not the Same

Another important distinction is between federal student loans and private student loans.

Federal student-aid programs have specific eligibility rules established by federal law. A private lender, on the other hand, makes its own underwriting decisions subject to applicable law and the terms of its lending program.

A bankruptcy can therefore make obtaining private educational financing more difficult, particularly while the bankruptcy or its negative credit information is relatively recent.

The lender may look at your credit history, income, existing debt and other factors when deciding whether to extend credit and at what interest rate.

This is similar to what happens when someone attempts to obtain a mortgage, automobile loan or credit card after bankruptcy. The bankruptcy does not necessarily make obtaining credit impossible, but it can affect the terms on which credit is available.

What About a Student Who Is Filing Bankruptcy?

Suppose a college student has accumulated credit-card debt, medical bills or other unsecured debts and is considering Chapter 7 bankruptcy.

The student should not assume:

“If I file bankruptcy, I won’t be able to finish college because I won’t be eligible for federal student loans.”

That conclusion is generally incorrect.

Federal law does not permit a student’s federal financial aid eligibility to be denied solely because the student filed bankruptcy.

The student still has to satisfy the ordinary federal student-aid requirements, and any existing federal student-loan default can be a separate issue.

What About a Parent Filing Bankruptcy While the Child Is in College?

This is a situation that deserves particular attention.

A parent may be able to obtain federal financial aid for the child after bankruptcy, but a Parent PLUS Loan can be affected by the parent’s credit history.

Therefore, if a parent is considering bankruptcy and expects to rely upon Parent PLUS financing to help pay college expenses, I would want that parent to understand the potential consequences before filing.

This is one of those situations where the timing and type of financing can matter.

Bankruptcy Does Not Make You Financially Invisible

There is another practical consideration.

Even when bankruptcy does not legally prevent you from obtaining federal student aid, the bankruptcy will still be part of your financial history. Credit reporting agencies may report bankruptcy information, and lenders may consider it when you apply for private financing or other forms of credit.

So there are really two separate questions:

1. Am I legally eligible for federal student aid?
2. Will a particular lender approve me for the financing I want?

Those are not necessarily the same question.

What I Tell My Bankruptcy Clients

When someone asks me whether bankruptcy will prevent them from getting student loans, I want to know what kind of student loan they are talking about.

If it is an ordinary federal Direct Loan for the student, the fact that the student or parent filed bankruptcy does not, by itself, make the person permanently ineligible for federal student aid.

If the borrower has a defaulted federal student loan, however, that can create a separate eligibility problem.

And if the parent is counting on a Parent PLUS Loan, the parent’s recent bankruptcy and credit history can be particularly important.

So, as with many questions involving bankruptcy, the answer is:

It depends upon the type of loan, whose name the loan is in, whether there is an existing student-loan default, and the timing of the bankruptcy.

If you are considering bankruptcy and you or your child will need student loans to attend college, this is something you should discuss with your bankruptcy attorney before filing the case. A bankruptcy filing is a major financial decision, and it is important to consider not only the debts you are trying to eliminate but also the financing you may need in the future.

This article is intended for general informational purposes. Student-loan eligibility rules can change, and individual circumstances can affect the result.