Can Bankruptcy Clear Parent PLUS Loans? A Guide

Parent PLUS loans can help your child get an education. But what if the payments become too much? Can bankruptcy discharge Parent PLUS loans? Many parents ask this question, and the answer isn’t simple.

Dealing with Parent PLUS loans during bankruptcy can be confusing. This article will help you understand the process. It covers how bankruptcy affects Parent PLUS Loan eligibility. It also discusses your options if these education loans aren’t dischargeable through bankruptcy.

Understanding Parent PLUS Loans

Parent PLUS loans help parents pay for their children’s college. As of 2021, 3.6 million student borrowers owe a combined $103.6 billion. Parents can borrow up to the cost of attendance, minus other financial aid.

This can be helpful, but it’s important to understand the fees and interest. These federal loans are a specific loan program meant to help student borrowers, but high interest can affect borrowers’ long-term financial situation.

Fees and Interest Rates

Parent PLUS loans have an origination fee, currently 4.228%. This fee is taken directly from your loan amount.

The interest rate is almost double that of regular student loans. From July 2021 to July 2022, Parent PLUS loan rates were 6.28%. Other student loans were just 3.73%.

You must assess the long-term cost before getting a Parent PLUS loan. Consider the high interest rates and commit to the repayment plan.

Bankruptcy and Parent PLUS Loan Eligibility

Filing for bankruptcy doesn’t stop you from getting a Parent PLUS loan. The Bankruptcy Reform Act of 1994 protects your right to federal student aid.

Your aid won’t be withheld just because you’re going through bankruptcy. This is based on U.S. law defining creditworthiness. It also accounts for trust from creditors given recent bankruptcy filings.

However, the Higher Education Act allows denial for credit history issues. An adverse credit history includes late payments, defaults, and bankruptcies within the past five years.

Getting a Parent PLUS Loan With an Adverse Credit History

You can still get a PLUS Loan with credit challenges. Complete credit counseling. Appeal the denial, maybe with proof of special circumstances.

You can also have a co-signer with good credit. This could involve showing how bankruptcy filings weren’t accurate. Maybe there were errors or miscommunication during the filing process.

It is up to the loan borrower and their bankruptcy attorney to accurately submit relevant financial information in accordance with legal guidelines during bankruptcy proceedings to meet the requirements of loan programs. Bankruptcy courts evaluate all aspects of an individual’s adverse credit history including tax liens, current delinquency, good faith efforts towards repayment, and future financial stability before approving loans. Your bankruptcy discharge may impact the ability for parent loans, including consolidation loans and direct parent PLUS loans, to be included in future bankruptcy cases as bankruptcy courts review the complete payment history.

Can Bankruptcy Clear Parent PLUS Loans?

It’s tough, but possible to discharge some Parent PLUS loans through bankruptcy. Both Chapter 7 and Chapter 13 allow for this. It requires filing an adversary proceeding within your case.

You must prove that repayment creates undue hardship for you and your dependents. This is known to be difficult to achieve.

The Brunner Test and Undue Hardship

Judges use the Brunner Test. This test looks at three things:

1. Can you maintain a minimal standard of living while repaying the loans?
2. Will your finances stay the same for most of your repayment term?
3. Have you shown good faith efforts in making payments? Did you try other options before bankruptcy?

Bankruptcy discharge of Parent PLUS loans isn’t automatic, even in Chapter 7 or 13. You must convince the court that you meet the criteria above.

Unsubsidized Stafford loans may also be difficult to discharge during bankruptcy proceedings as it can depend on factors like current income and monthly payments, even with contingent repayment or income-contingent repayment plans. Both private student loan bankruptcy and private student loans themselves face challenges during discharge as private student loan bankruptcy guidelines often differ from federal loan discharge guidelines, and can be discharged, only under rare and very specific circumstances.

Parent PLUS Loan Discharge Options

Some borrowers don’t need bankruptcy to discharge Parent PLUS loans. You might qualify for the Public Service Loan Forgiveness (PSLF) program.

If you have served the public, made qualifying payments, you could be eligible. Death or permanent disability can also discharge Parent PLUS loans.

The government has programs for these situations. Federal student loans and unsubsidized Stafford loans have similar stipulations.

What If Parent PLUS Loans Aren’t Dischargeable?

If bankruptcy can’t clear your Parent PLUS loans, you have other options. You can formally request lower payments through an income-driven repayment plan.

You could also refinance your loan. A third-party lender may offer better terms.

Parent PLUS loans are a significant part of student loan debt. Don’t let confusion stop you from finding a solution.

Many resources exist to help students manage private loans or understand student loan discharge. Your current financial situation is considered when assessing your ability to make minimum monthly payments according to your financial circumstances.

Financial aid is available if your current financial situation changes unexpectedly during the life of the loan. Talking with your loan servicer can bring clarification regarding current or existing Parent Plus loan programs and if there are more benefits with alternate loan programs that can assist students to pay for higher education.

Conclusion

Discharging Parent PLUS loans through bankruptcy is a growing concern. Higher education costs make this a complex issue. Many resources can help navigate your financial situation and if you should proceed with filing a bankruptcy case called an adversary proceeding in an effort to clear Parent PLUS loans. Parents want the best for their children’s future, often through Parent PLUS loans, which are designed to provide support when other options, including private loans, aren’t viable. These loans benefit students immensely by helping them secure educational opportunities. Navigating this process is tricky.

Resources are available to help. Contact government agencies, like the U.S. Department of Education. Private firms and counselors also offer guidance.

Bankruptcy is just one path. It won’t automatically lead to legal action or jail time. Other options often get approved quickly. Don’t hesitate to seek professional help to find the best solution for you. You can easily schedule a consultation with bankruptcy attorney William Waldner. It’s free and there is never any obligation to move forward with bankruptcy. It’s all about what’s best for you and your financial situation.