Parent PLUS Loan Bankruptcy: Before and After You File

Parent PLUS loans account for almost a quarter of new federal borrowing for undergraduates. And although they are just 6% of the $1.57 trillion in current federal student debt, these loans are problematic because they allow families to borrow without regard to their ability to repay. If a parent loan borrower defaults, the government can collect through wage garnishment and Social Security and tax refund offsets. To top it off, Parent PLUS loans, like all federal higher education loans, are difficult to discharge in bankruptcy.

If you’ve already filed bankruptcy or are considering filing, it’s crucial to understand how Parent PLUS Loans and bankruptcy work together.

What is a PLUS Program Loan?

Parent PLUS Loans are federal student loans parents can take out to pay for their child’s college education. According to the latest data found on Federal Student AidFederal Student Aid (FSA)The office within the U.S. Department of Education that manages federal grants, work-study, and student loans. It runs the FAFSA, the StudentAid.gov website, and oversees the federal loan servicers., the total Parent PLUS LoanParent PLUS LoanA federal Direct PLUS Loan taken out by the biological, adoptive, or stepparent of a dependent undergraduate student. The parent is legally responsible for repayment, not the student. debt is $103.6 billion, spread amongst 3.6 million borrowers.

Parents are allowed to borrow up to their child’s cost of attendance minus any other financial aid they receive. While Parent PLUS Loans benefit your child, they come at a cost to you. The loan costs for Parent PLUS Loans are a bit higher than those of other federal loans like Direct Loans or Federal Perkins Loans. Parents have to pay a loan origination fee of 4.228% (the fee’s deducted from the loan disbursement), and they are charged an interest rate that’s nearly double the rate student borrowers are charged.

Interest Rates July 1, 2021 – July 1, 2022 :

• Direct Subsidized LoanDirect Subsidized LoanA federal student loan for undergraduates with demonstrated financial need. The government pays the interest while the borrower is in school at least half-time, during the grace period, and during approved deferment.: 3.73%
• Direct Unsubsidized LoanDirect Unsubsidized LoanA federal student loan available to undergraduate and graduate students regardless of financial need. Interest accrues from the moment the loan is disbursed, including while the borrower is still in school.: 3.73%
• Direct Graduate PLUS Loan Unsubsidized: 5.28%
• Direct Parent PLUS 6.28%

The interest rate for Direct Consolidation Loans is based on the weighted average of the interest rate of the loans included in the consolidation application.

How does bankruptcy affect Parent PLUS loan eligibility?

Filing bankruptcy does not automatically stop you or your spouse from borrowing a Parent PLUS Loan. Federal law prohibits the US Department of Education from denying you access to Federal Student Aid because you filed bankruptcy or are currently in bankruptcy. Bankruptcy Code, 11 USC § 525(c).

Related: Parent PLUS Loan vs Private Loan

How to get a Parent PLUS Loan with an adverse credit history

• Apply with an endorser who doesn’t have an adverse credit history. An endorser is like a cosignerCosignerA person who signs a loan agreement alongside the primary borrower and becomes equally responsible for repayment. Cosigners are common on private student loans when the student has limited credit or income history. in that they are someone who agrees to pay your student loan debt if you defaultDefaultThe status of a federal student loan after the borrower has failed to make required payments for 270 days. Default can trigger collection actions such as wage garnishment, tax refund offset, and damage to credit reports.. Your cosigner can complete an endorser addendum online using their FSA ID.
• Appeal the credit decision. The Department allows you to appeal a denial for two reasons: the information on your credit report is incorrect, or there are extenuating circumstances related to your credit. Before submitting your appeal, check the FSA site to see what documentation you can submit in support. Once the Department receives your appeal, it will issue its determination within 10 business days.

What happens if you're denied a Parent PLUS loan?

If you’re denied a Parent PLUS Loan, the Department of Education will increase the loan limit your child can borrow. For their first and second years in school, they’ll be able to borrow an additional $4,000 in unsubsidized Stafford Loans. For their third year and beyond, their limit will increase by an extra $5,000 annually.

You can also look into borrowing private education loans.

What happens to Parent PLUS Loans in bankruptcy?

Filing bankruptcy typically puts your Parent PLUS Loans into an administrative forbearance until your case ends. However, if your bankruptcy attorney put you in Chapter 13, you may want to keep making loan payments. If not, you may lose three to five years of credit towards loan forgiveness. Plus, interest will continue to be added to your balance.

Can Parent PLUS loans be discharged in bankruptcy?

Parent PLUS Loans can be discharged in both Chapter 7 bankruptcy and Chapter 13 bankruptcyChapter 13 BankruptcyA form of federal bankruptcy in which the debtor follows a three-to-five-year court-approved repayment plan. Student loan balances remaining after the plan are not automatically discharged and require a separate adversary proceeding. like other types of federal and private student loans. But you first have to file a lawsuit in your bankruptcy case called an adversary proceeding. In the adversary complaint, you’ll have to show the bankruptcy judge that repaying the loans would cause an undue hardshipUndue HardshipThe legal standard a borrower must meet to discharge federal student loans in bankruptcy under 11 U.S.C. § 523(a)(8). Courts apply different tests, most commonly the Brunner Test or the Totality of the Circumstances Test. to you and your dependents. Meeting the undue hardship standard for student loan discharge is challenging.

Most bankruptcy courts use the Brunner Test to determine if you’ve met the standard. The Brunner TestBrunner TestA three-part legal standard many bankruptcy courts use to decide whether repaying student loans would cause undue hardship. It considers current income, likely future circumstances, and good-faith effort to repay. reviews three criteria:

1. Your current income. Based upon your current income and expenses, you cannot maintain a minimal standard of living for yourself and your dependents if you are forced to repay your loans.
2. Your future financial situation. Your current financial situation is likely to continue for a significant part of the repayment period.
3. Your good faith efforts. You’ve made monthly payments, requested deferment and deferment, and have applied for income-driven repaymentIncome-Driven Repayment (IDR)A category of federal student loan repayment plans that calculate monthly payments based on income and family size rather than loan balance. Any remaining balance can be forgiven after 20–25 years of qualifying payments. and loan consolidation.

You can read more about the student loan bankruptcy process here.

Parent PLUS Loan Discharge Options

The federal government offers Parent PLUS Loan Forgiveness and discharge options for parents that

• work in public service (e.g., for the government or qualifying nonprofit)
• make 20/25 years of qualifying payments (Income-Contingent RepaymentIncome-Contingent Repayment (ICR)The oldest federal income-driven repayment plan, with payments generally set at 20% of discretionary income or a fixed 12-year amount, whichever is lower. It is the only IDR plan available to Parent PLUS borrowers after consolidation. Plan Forgiveness)
• become permanently disabled (Total and Permanent Disability DischargeTotal and Permanent Disability Discharge (TPD)A federal loan discharge for borrowers who are totally and permanently disabled, as documented by the Department of Veterans Affairs, the Social Security Administration, or a physician's certification.)
• they die, or the child they borrowed the loans for dies (Death DischargeDeath DischargeThe cancellation of federal student loans when the borrower dies. On a Parent PLUS Loan, the loan is also discharged if the student on whose behalf it was taken dies.)

Note: To qualify for PSLF, the parent who borrowed the loan must work in public service and have loans made under the Direct LoanDirect LoanA federal student loan made directly by the U.S. Department of Education under the William D. Ford Federal Direct Loan Program. Most federal student loans issued since 2010 are Direct Loans. Program. If you borrowed Parent PLUS Loans for a child who went to school before 2011, you might have loans that don’t qualify for PSLFPublic Service Loan Forgiveness (PSLF)A federal program that forgives the remaining balance on Direct Loans after 120 qualifying monthly payments made while working full-time for a government or qualifying nonprofit employer.. Check studentaid.gov to see what type of loans you borrowed.

Options if your Parent PLUS Loans aren't dischargeable

If you’re unable to discharge your Parent PLUS Loans in bankruptcy, here are two other options to consider:

• Request a lower payment: parent borrowers who can’t afford their monthly payment can request an amount based on 20% of their discretionary income by applying for an income-driven repayment plan. If you haven’t already done so, you will need to apply for a Federal Direct ConsolidationFederal Direct ConsolidationThe combining of one or more federal student loans into a single new Direct Consolidation Loan. Consolidation can restore defaulted loans to good standing, change the servicer, and open access to certain repayment plans and forgiveness programs. Loan to qualify for the IDR plan.
• Refinance for a lower interest rate: depending on your credit score, refinancing with a private lender can get you a much lower interest rate.But refinancing federal loan debt into a private student loan causes you to lose certain federal benefits like income-based repaymentIncome-Based Repayment (IBR)A federal income-driven repayment plan that caps monthly payments at 10% or 15% of discretionary income, depending on when the loans were taken out. Remaining debt is forgiven after 20 or 25 years of qualifying payments. options, deferment, forbearance, and loan forgiveness.

Want help with a Parent PLUS Loan? Let's talk.

Parent PLUS Loans can be challenging to deal with. It seems like no matter what you do, your loan servicerLoan ServicerThe company that manages a borrower's federal student loan account, processes payments, and handles applications for repayment plans, deferment, forbearance, and forgiveness on behalf of the U.S. Department of Education. refuses to give you an affordable payment. Plus, the interest rate is insane.

I get it. I’ve helped many parents explore their repayment options to develop a payment plan to deal with their loans. Let me do the same for you. Schedule a call with me. I’ll get a better understanding of your situation and what you want to accomplish, and when.

From there, we can create a plan to get your Parent PLUS Loans in order, so you can live your life without having to worry about the debt you borrowed for your child taking your home, garnishing your retirement, etc.