debt

Student loans available after bankruptcy

Justin HarelikQuestionDear Bankruptcy Adviser,
I have a family consisting of my wife and three kids. We had to claim bankruptcy in 2008 due to medical reasons. I hope to go back to school this fall. Considering the bankruptcy, I don't know how much money we can get through the government for loans to finance my education. Would private loans be unavailable, even though we claimed bankruptcy because of medical reasons?
-- Matt

AnswerDear Matt,
There are two types of student loans available to pay for school tuition and related expenses such as books and housing: government loans and private loans. But don't forget to look into the third alternative: grants and scholarships.

Depending on the cost of school, and considering you have a wife and three children, you might not get enough loans from one source to cover all your education costs.

However, I'm hopeful the government loans are enough for you to avoid private loans. In my opinion, privately funded school loans can be an albatross that will haunt your future forever. Am I a little cynical about private loans? Maybe. These loans can carry high, fluctuating interest rates and are more like taking out a personal loan from a finance company. I have seen too many clients dealing with ruined credit and garnishments because of private student loans. Even worse, many of the same clients cannot find work in the field in which they studied.

Government loans

Government loans are divided into two types: Stafford and Perkins loans. Both are based on needs and not on credit. That means you can receive the loans regardless of your credit history. The amounts you can receive are very specific and can be found at the website for Student Aid on the Web.

Stafford Loans come in two categories: subsidized and unsubsidized. With subsidized loans, the government pays the interest while you are in school. You must be able to demonstrate financial need to qualify. Unsubsidized loans means that the interest isn't paid by the government while you are in school, and you are ultimately responsible for it. However, as with subsidized loans, you only begin repayment after you're finished with school.

The Perkins loan is awarded to undergraduate and graduate students with exceptional financial needs. This is the better of the two types of loans because the interest is paid while in school, plus there is a nine-month grace period after you leave school. The student loan office at your prospective school determines the amount you are eligible to receive. Unfortunately, the future of the Perkins loan program is uncertain. It is set to expire in late 2012 unless Congress acts.

Private or alternative loans

Private student loans are credit-based and made by private lenders. You can still get them with poor credit. The interest rates will fluctuate, the loan repayment terms are inflexible and the default consequences are dire.

I know they serve a purpose and I know that many successful people have taken out private loans and paid them off. But the stories of default, lawsuits and garnishments outweigh the benefits of the loans.

Many lenders don't seem to care because the debt is almost impossible to eliminate. Bankruptcy laws exempt student loans from discharge in the vast majority of cases. The standard to eliminate student loans in bankruptcy is extremely high. You basically have to prove you will never, ever be able to work again, at any job, for any wage.

I may sound harsh. But I will work nights and weekends to make sure my kids never need to fund their education with private loans.

Grants and scholarships

There are hundreds of grants and scholarships available to help with school costs. While many people will be competing for them, you don't want to miss out on any free funds. Consider it a part-time job to research and find all the possible offers available.

Good luck, and congratulations on your decision to return to school.

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