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How Do Parent Financial Problems Affect a Student's Eligibility for Financial Aid?

Mark Kantrowitz

December 13, 2010

You will not be eligible for the Federal Parent PLUS loan for five years from the date of your bankruptcy discharge. The clock starts at the beginning of your Chapter 13 repayment plan, not the end. So depending on how long you’ve been in the Chapter 13 repayment plan, you might be eligible for the Parent PLUS loan.

Your daughter’s eligibility for the Federal Perkins and Federal Stafford loans is not affected by your bankruptcy filing. There is no defense of infancy for federal education loans, so her age also does not matter.

If you are ineligible for the Parent PLUS loan, she will be eligible for increased unsubsidized Stafford loan limits. The unsubsidized Stafford loan limits for a dependent student whose parent was denied a Parent PLUS loan are the same limits available to independent students. These limits are $4,000/year higher during the freshman and sophomore years and $5,000/year higher during the junior and senior years. The maximum total Stafford loan debt for an independent student for four years of college is $45,000.

Private student loans, however, are another matter. She is unlikely to qualify for private student loans without a cosigner. Most lenders will not allow a parent who filed for bankruptcy within the last 7 or 10 years to cosign a private student loan. Before the credit crisis some lenders would make exceptions when the bankruptcy was due to circumstances beyond the family’s control, especially when those circumstances are unlikely to happen again. But the credit crisis has lead to much tighter credit underwriting standards. Even borrowers with clean credit are having difficulty getting private student loans.

But if your daughter exhausts the federal loan limits and still needs money, that’s probably a sign that she’s overborrowing. Students should not borrow more for their education than their expected starting salary and ideally a lot less. If she’s going to need to borrow more than $10,000 per year in school, she should consider enrolling in a less expensive college, such as an in-state public college.

I’m a parent in default on a FGSL. This happen in the 1980s when I had to leave the States because I couldn’t find a job and was experiencing severe financial hardships. Now my son is going to college and will need federal aid. Because of my loan default can he be denied financial aid? Can my actions end up hurting him? — F.D.

The GSL is a predecessor of the Stafford loan. Your default on this federal education loan does not affect your son’s eligibility for federal student aid.

Your default does, however, affect your ability to borrow the Federal Parent PLUS loan program to pay for his education. Parents who are in default on a federal education loan are ineligible for the Parent PLUS loan until they rehabilitate their defaulted loans. To regain eligibility for federal education loan you will have to make six full voluntary consecutive on-time monthly payments on the loans, not counting any payments made through wage garnishment or the offset of income tax refunds. In the meantime your son will be eligible for the higher unsubsidized Stafford loan limits available to independent students.


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