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Bankruptcy and student loans

For many people, student loans are likely the first large loan that they ever take out - fresh out of high school, thousands of students rely on public or private student loans to pay their way through college. After college, it can be a strain, in some cases, to repay these loans. This is especially problematic for young graduates because student loans are among the only debts that cannot be discharged in bankruptcy.

This isn't to say that bankruptcy can't still help in some ways, however. If a person is in serious financial trouble, and facing debts from many different directions, bankruptcy can be an effective tool. Even though the student loans cannot be discharged in bankruptcy, the removal of the other debts could give the graduate the financial breathing room necessary to pay down the tuition debt.

That isn't the only interaction between student loans and bankruptcy, however. Bankruptcy also affects the student loans that one can apply for in the future. Many loans that students can apply for are based on the parents' financial situation. A recent bankruptcy can make it difficult for families to qualify for such loans.

As one bankruptcy attorney pointed out, however, this is unlikely to have any effect on the student. Parents who are in a position to consider bankruptcy are not likely to qualify for a student loan, whether they declare bankruptcy or not.

In fact, a parents' bankruptcy can, in some situations, help students receive a more favorable loan they would have gotten otherwise. A recent bankruptcy by a student's parents can help meet the eligibility requirements on a Stafford loan, which is a federally secured loan with a lower interest rate. This loan is often more preferable than any alternatives that would be available to the student.

Source: US News and World Report, "How Bankruptcy Affects College, Grad School Financing" Kelsey Sheehy, Nov. 14, 2013

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