Section 313 of the Bankruptcy Reform Act of 1994 (P.L. 103-394) added a restriction in 11 USC 525(c) that precludes denying government grants and loans to borrowers who had filed for bankruptcy or were granted a bankruptcy discharge, effective October 22, 1994. The specific statutory language in 11 USC 525(c) is as follows:
(c)(1) A governmental unit that operates a student grant or loan program and a person engaged in a business that includes the making of loans guaranteed or insured under a student loan program may not deny a student grant, loan, loan guarantee, or loan insurance to a person that is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, or another person with whom the debtor or bankrupt has been associated, because the debtor or bankrupt is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of a case under this title or during the pendency of the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act. (2) In this section, "student loan program" means any program operated under title IV of the Higher Education Act of 1965 or a similar program operated under State or local law.However, the US Department of Education subsequently issued guidance concerning the Bankruptcy Reform Act of 1994 in Dear Colleague Letter GEN-95-40 (see especially the Q&A in the attachment to GEN-95-40). This guidance specified that borrowers who have an adverse credit history (including those with a bankruptcy discharge in the last five years) remain ineligible for the Parent PLUS loan. Education lenders and the US Department of Education's Direct Loan program have continued to deny Federal PLUS loans to parent borrowers on the basis of this guidance. The following is a key excerpt from the guidance highlighting the essence of the US Department of Education's argument why a borrower with a bankruptcy in the last five years may be denied a Federal PLUS loan.
7. Will bankruptcy still be a factor in determining if an applicant for a Federal PLUS or Federal Direct PLUS loan has an adverse credit history? Yes. An applicant for a PLUS loan under either loan program who has been the subject of a bankruptcy discharge during the 5 years preceding the date of the applicant's credit report, continues to be considered to have an adverse credit history, and thereby ordinarily not eligible for the loan. However, like any other PLUS loan applicant with an adverse credit history, such an applicant could still qualify for a loan if the applicant persuades the maker of the loan (and the maker documents its determination) that extenuating circumstances mitigated the adverse credit inference suggested by that filing or, in the absence of such circumstances, it agreed to make the loan on the condition that the applicant obtain a creditworthy endorser. Taking into account the fact of a prior bankruptcy discharge in this manner does not violate bankruptcy law, because in so doing, the maker of the loan does not reject the loan applicant solely on account of the prior discharge, but remains willing to make the requested loan on the condition that the applicant satisfactorily rebuts the negative inference suggested by that prior discharge. The applicant can do so by demonstrating either that the loan, if not paid by the applicant, will be repaid by another individual who is creditworthy, or that the inference of lack of creditworthiness should not be drawn with respect to this particular applicant."