Although bankruptcy makes it tough to obtain credit, it sometimes has no effect on your financial aid package and sometimes gets you more aid. However, bankruptcy can cause a lender to reject you for student loans. The best way to gauge how bankruptcy and bad credit affect financial aid is to consult your school's financial aid office.
Identification
You can get most financial aid, such as state and federal grants and work-study jobs, with a bankruptcy on file. The only items a bankruptcy affects are private student loans and the federal PLUS loan. Bankruptcy usually brings a person's credit rating to below average, which means you likely cannot get private student loans. If your parents have a bankruptcy on file, they cannot obtain a PLUS loan.
PLUS and Stafford Loans
If your parents cannot take out a PLUS loan on your behalf, you receive an extra $4,000 in unsubsidized Stafford loans during your first two years of college and an extra $5,000 in your last two years. Some students prefer a higher unsubsidized Stafford loan limit, because the Stafford loan usually has a lower interest rate. For instance, in June 2011, PLUS loans had an interest rate of 7.8 percent, while Stafford loans had an interest rate of 6.8 percent.
Federal Student Loans
If you have previous federal student loans that were not included in the bankruptcy and are in default, you cannot receive further financial aid until you become current on the loans. You should talk to your lender about federal student loan repayment. You can set up a repayment plan that gets you on track to paying off the loan on schedule instead of making a lump-sum payment. If you included federal loans under a Chapter 13 bankruptcy repayment plan, which allows a monthly payment based on your income, they are current.
Tip
Talk to your financial aid office about how a past or impending bankruptcy will affect your credit. The Department of Education could allow you to appeal a denial of a PLUS loan because of extenuating circumstances, such as medical bills driving you into bankruptcy. The financial aid office might count a Chapter 13 repayment plan as a debt, which could qualify you for more aid.
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