A parent’s bankruptcy doesn’t affect their child’s student loan application, but it does limit his funding options. It’s the student’s credit report and credit history that determine loan prospects, rather than the parents. However, a parental bankruptcy does limit their ability to help pay for college, as it likely takes PLUS or co-signed loans off the table.
Federal Loans
If you’re applying for government funding for college, a parent’s bankruptcy won’t affect your ability to secure financial aid. The Bankruptcy Reform Act of 1994 prevents the government from using a current or previous bankruptcy petition as the sole reason to deny a student grants or loans. Federal student loans don’t depend on the borrower’s credit history, nor do federal grants, state grants or grant or scholarship money from the college.
PLUS Loans
A parent who has been through bankruptcy within the past five years isn’t eligible to take out a Federal PLUS loan. Given the increased cost of attending college and the billions of dollars disbursed in PLUS loans annually, this can be a hardship. However, if your parents have been denied a PLUS loan based on their credit history, you may receive an increased limit for your unsubsidized Stafford loan eligibility.
Private Loans
Students seeking private loans to help pay for college may be more affected by a parent’s bankruptcy filing. Parental bankruptcies don’t appear on a student’s credit report, so a private loan that doesn’t require a co-signer won’t take that into consideration. However, considering that many students don’t have much of a credit history for lenders to work with, a parental bankruptcy may mean you'll have to find someone else with better credit to co-sign for your loans.
Higher EFC
One negative affect of a parental bankruptcy on a student loan application may be an expected family contribution that’s higher than it ordinarily would be. If your parents have agreed to a court-approved repayment plan to settle debts, that amount won’t show up when you fill out your Free Application for Federal Student Aid, which means it will appear as if you have more money available than you do. A review by your college’s financial aid office may be beneficial and lead to more school-sponsored aid if it agrees to take that into account when crafting its financial aid package.