FAQs About Financial Aid

Here are some of the most commonly asked questions about financial aid.

Topics:

1. General Questions about Eligibility and Applying
2. FAFSA Questions
3. What is the relationship between bankruptcy and financial aid?

General Questions about Eligibility and Applying

I probably don't qualify for aid. Should I apply for aid anyway?
Yes. Many families mistakenly think they don't qualify for aid and prevent themselves from receiving financial aid by failing to apply for it. In addition, there are a few sources of aid such as unsubsidized Stafford and PLUS loans that are available regardless of need. The FAFSA form is free. There is no good excuse for not applying.

Do I need to be admitted before I can apply for financial aid at a particular university?
No. You can apply for financial aid any time after January 1. To actually receive funds, however, you must be admitted and enrolled at the university.

Why can't I submit my financial aid application before January 1?
The need analysis process for financial aid uses the family's income and tax information from the most recent tax year (the base year) to judge your eligibility for need-based financial aid during the upcoming academic year (the award year). Since the base year ends December 31, you cannot submit a financial aid application until January 1. After all, your parents might earn a year-end bonus or realize capital gains from selling stocks on December 31. If you submit the financial aid application before January 1, it will be rejected.

Do I have to reapply for financial aid every year?
Yes. Most financial aid offices require that you apply for financial aid every year. If your financial circumstances change, you may get more or less aid. After your first year you will receive a "Renewal Application" which contains preprinted information from the previous year's FAFSA. Note that your eligibility for financial aid may change significantly, especially if you have a different number of family members in college. Renewal of your financial aid package also depends on your making satisfactory academic progress toward a degree, such as earning a minimum number of credits and achieving a minimum GPA.

How do I apply for a Pell Grant and other types of need-based aid?
Submit a FAFSA. To indicate interest in student employment, student loans and parent loans, you should check the appropriate boxes. Checking these boxes does not commit you to accepting these types of aid. You will have the opportunity to accept or decline each part of your aid package later. Leaving these boxes unchecked will not increase the amount of grants you receive.

Are my parents responsible for my educational loans?
No. Parents are, however, responsible for the Federal PLUS loans. Parents will only be responsible for your educational loans if they co-sign your loan. In general you and you alone are responsible for repaying your educational loans.

You do not need to get your parents to cosign your federal student loans, even if you are under age 18, as the 'defense of infancy' does not apply to federal student loans. (The defense of infancy presumes that a minor is not able to enter into contracts, and considers any such contract to be void. There is an explicit exemption to this principle in the Higher Education Act with regard to federal student loans.) However, lenders may require a cosigner on private student loans if your credit history is insufficient or if you are underage. In fact, many private student loan programs are not available to students under age 18 because of the defense of infancy.

If your parents (or grandparents) want to help pay off your loan, you can have your billing statements sent to their address. Likewise, if your lender or loan servicer provides an electronic payment service, where the monthly payments are automatically deducted from a bank account, your parents can agree to have the payments deducted from their account. But your parents are under no obligation to repay your loans. If they forget to pay the bill on time or decide to cancel the electronic payment agreement, you will be held responsible for the payments, not them.

Why is the family contribution listed on the SAR different from the family contribution expected by the university?
The federal formula for computing the expected family contribution is different from those used by many universities. In particular, the federal formula does not consider home equity as part of the assets.

If I take a leave of absence, do I have to start repaying my loans?
Not immediately. The subsidized Stafford loan has a grace period of 6 months and the Perkins loan a grace period of 9 months before the student must begin repaying the loan. When you take a leave of absence you will not have to repay your loan until the grace period is used up. If you use up the grace period, however, when you graduate you will have to begin repaying your loan immediately. It is possible to request an extension to the grace period, but this must be done before the grace period is used up.

If your grace period has run out in the middle of your leave of absence, you will have to start making payments on your student loans.

I got an outside scholarship. Should I report it to the financial aid office?
Yes. If you are receiving any kind of financial aid from university or government sources, you must report the scholarship to the financial aid office.

Unfortunately, the university will adjust your financial aid package to compensate. Nevertheless, the outside scholarship will have some beneficial effects. At some universities outside scholarships are used to reduce the self-help level. For example, at MIT the outside scholarship is first applied to reducing the self-help level, and only when the scholarship exceeds self-help does it replace institutional grants. At other universities outside scholarships are used to replace loans instead of grants.

Where can I get information about Federal student financial aid?
Call the Federal Student Aid Information Center (FSAIC) at 1-800-4-FED-AID (1-800-433-3243) or 1-800-730-8913 (if hearing impaired) and ask for a free copy of The Student Guide: Financial Aid from the US Department of Education. This toll free hotline is run by the US Department of Education and can answer questions about federal and state student aid programs and applications. You can also write to

Federal Student Aid Information Center
PO Box 84
Washington, DC 20044

Are work-study earnings taxable?
The money you earn from Federal Work-Study is generally subject to federal and state income tax, but exempt from FICA taxes (provided you are enrolled full time and work less than half-time).

Federal Work-Study earnings during the calendar year should be included in the totals for AGI and Worksheet C on the FAFSA. Work-study earnings should only be included in Worksheet C when they represent financial aid to the student, since the answer to this question is used as an exclusion from taxed income. The student should also be careful to report amounts based on the calendar year, not the school year.

Is it legal for a 17-year-old student to sign a promissory note for a student loan, even though the student has not yet reached the age of majority?
Normally, a minor cannot be held liable for a contract that they sign. However, in 1992 the Higher Education Act was amended to permit eligible students, defined as per Title IV regulations, to sign promissory notes for their own Federal student loans. As such, student loans represent one of the few exceptions to the so-called "defense of infancy". The specific citation is section 484A(b)(2) of the Higher Education Act of 1965 (20 USC 1091a(b)(2)), and applies to Stafford, PLUS and Consolidation Loans. It does not appear to apply to Perkins and Direct Loans, although it was clearly the intent of Congress that it should.

Several states have also passed similar laws that consider minors to be competent to enter into a contract for an education loan. This extends similar protection to private and non-federal loans. All private education loans require a cosigner when the student is under the age of majority, just to be safe.

back to the top

FAFSA Questions

Where can I get a copy of the FAFSA?
You can ask your guidance counselor for a copy. You can also get the FAFSA from the financial aid office at a local college, your local public library, or by calling 1-800-4-FED-AID. The online version of the form is available at http://www.fafsa.ed.gov.

Are photocopies of the FAFSA acceptable?
No. Only the original FAFSA form produced by the US Department of Education is acceptable. Photocopies, reproductions, facsimiles and electronic versions are all not acceptable. (See DCL GEN-95-21.)

How soon after January 1 should the FAFSA form be sent in? Is it better to wait until the income tax forms have been completed?
Send in the form as soon as possible after January 1. Do not wait until your taxes are done. Although it is better to do your taxes early, it is ok to use estimates of your income, so long as they aren't very far off from the actual values. You will have an opportunity to correct any errors later. If you wait too long, you might miss the deadline for state aid. Most states require the FAFSA to be submitted by March 1, and some even as early as early or mid-February.

I sent in my FAFSA over four weeks ago but haven't heard anything. What should I do?
If you haven't received a Student Aid Report (SAR), call the Federal Student Aid Information Center at 1-800-4-FED-AID (toll free) or 1-319-337-5665. You must provide them with your Social Security number and date of birth as verification.

You can also write to:

Federal Student Aid Programs
PO Box 4038
Washington, DC 52243-4038

to find out whether your FAFSA has been processed or to request a duplicate copy of your SAR.

I was born on January 1, when I will be 24 years old. Can I check Yes in the answer to the FAFSA question "Were you born before January 1, ..." to qualify as an independent student?
The official answer is no. If you check yes, your SAR will be flagged for verification. However, most financial aid administrators would use professional judgment to override the default dependency determination for a student born on January 1 who also demonstrates financial self-sufficiency.

What do those acronyms on the Student Aid Report (SAR) mean?
The acronyms on the bottom of the SAR represent intermediate results in the need analysis. To fully understand their meaning, you will need to be familiar with the federal need analysis methodology, such as is used by the EFC Estimator. The meanings of the acronyms are as follows:

back to the top

Bankruptcy and Financial Aid

This page answers common questions about the relationship between bankruptcy and financial aid, such as student loans. The first answer concerns the impact of bankruptcy on eligibility for student loans. The second answer discusses whether student loans can be discharged through bankruptcy.

Thanks to Pat Somers of the University of Arkansas at Little Rock and Art Bilski of the Illinois Student Assistance Commission for their assistance with this section.

Bankruptcy and Eligibility for Financial Aid

Will a bankruptcy affect a student's future eligibility for student loans and other financial aid?

The answer to this question is a complex one because several issues are involved. It depends on the nature of the student loan programs (federal or private) and the type of bankruptcy.

Whatever the circumstances behind the bankruptcy, the student should talk with the financial aid administrator at the school he plans to attend, and explain the situation. The financial aid administrator may be able to guide the student to certain loan programs or lenders that may fit his needs.

Federal Loans

Generally speaking, a bankruptcy should have no impact on eligibility for federal student aid.

A few years ago students who had their federal student loans discharged through bankruptcy were required to reaffirm the debt in order to be eligible for further federal student aid. But the Bankruptcy Reform Act of 1994 (P.L. 103-394, enacted October 22, 1994) amended the FFELP regulations dealing with loans discharged in bankruptcy. As a result of those changes, a borrower who had FFELP loans previously discharged in bankruptcy is no longer required to reaffirm those loans prior to receiving additional federal student aid.

Title IV grant or loan aid (including the Perkins loan program) may not be denied to a student who has filed bankruptcy solely on the basis of the bankruptcy determination. Financial aid administrators are precluded from citing bankruptcy as evidence of an unwillingness to repay student loans. Schools may nevertheless continue to consider the student's post-bankruptcy credit history in determining willingness to repay the loan.

As long as there are no delinquencies or defaults on student loans currently in repayment, the student should be eligible for additional federal student loans, regardless of any past bankruptcies. However, if some of the student's federal student loans are in default and were not included in a bankruptcy, the student will not be able to get further federal student aid until he resolves the problem. Students with loans in default should contact the lender (or servicer or current holder of the loan) to set up a satisfactory repayment plan in order to regain eligibility for federal student aid. (If the loan was discharged in bankruptcy after the borrower defaulted on the loan, it is no longer considered to be in default.)

Parents who apply for a PLUS loan may be denied a PLUS loan if they have an adverse credit history. The definition of an adverse credit history includes having had debts discharged in bankruptcy within the past five years. If this is the case, the parents may still be eligible for a PLUS loan if they secure an endorser without an adverse credit history. If the parents are turned down for a PLUS loan because of an adverse credit history, the student may be eligible for an increased unsubsidized Stafford loan.

The anti-discrimination rules appear in 11 USC 525(c):

1. A governmental unit that operates a student grant or loan program and a person engaged in a business that includes the making of loans guaranteed or insured under a student loan program may not deny a student grant, loan, loan guarantee, or loan insurance to a person that is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, or another person with whom the debtor or bankrupt has been associated, because the debtor or bankrupt is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of a case under this title or during the pendency of the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.
2. In this section, "student loan program" means any program operated under title IV of the Higher Education Act of 1965 or a similar program operated under State or local law.

Private Loans

Private loans are an entirely different matter. Because of the many different types of bankruptcies, this is a very complex issue.

The student should contact the financial aid administrator at his school for advice on the impact of a bankruptcy on eligibility for private loans. The student should also talk to the lender and provide evidence that he is a good risk, and be prepared to explain the circumstances behind the bankruptcy. The lender may be more willing to issue a loan if the borrower offers to secure the loan. If the student is still having problems, he may want to consult the attorney who handled the bankruptcy.

Most bankruptcies will have an impact on eligibility for private loan programs, including some school loan programs. Many private loan programs have credit criteria that preclude people with a bankruptcy within the past 7 or 10 years from borrowing without a creditworthy cosigner. There are, however, exceptions if the bankruptcy was initiated for reasons beyond the borrower's control, such as extraordinary medical costs, natural disasters, or other extenuating circumstances.

If a parent went through bankruptcy, it should have absolutely no impact on their children's eligibility for private loans, unless the parent is required to cosign the loans.

If the bankruptcy filing included a payout plan, even if not 100%, the student will be at an advantage in applying for private loans. Bankruptcy filers with a payout plan, especially a 100% payout plan, are a better risk than most people who have gone through bankruptcy. On the other hand, if the borrower went the Chapter 7 route, he may have more difficulty in getting a private loan. Lenders tend to look less favorably on complete liquidations. Thus borrowers who filed for a Chapter 11 (or Chapter 13) and had a payout plan will be more likely to get a private loan than borrowers who filed a Chapter 7.

Lenders also look at whether the borrower is able to refile for bankruptcy. Chapter 11 filers cannot immediately refile again for bankruptcy. Although any lender should know this, they may need to be reminded. Chapter 7 files are prohibited from refiling a Chapter 7 bankruptcy for 6 years. However, Chapter 13 plans have no such restriction, so a debtor can file a Chapter 7 bankruptcy, have their debts discharged, and then file a Chapter 13 within a very short time if new debt is incurred. A debtor can file an unlimited number of Chapter 13 bankruptcies. On the other hand, Chapter 13 filers are prohibited from filing a Chapter 7 immediately.

Nevertheless, lenders tend to be wary of Chapter 13 bankruptcies because a high percentage of them are converted to Chapter 7 cases or are dismissed because the debtor is unable or unwilling to continue with the payment plan established under the Chapter 13 repayment plan.

Discharging Student Loans through Bankruptcy

Can educational loans, such as the Federal Stafford, Federal PLUS, and private loans, be discharged through bankruptcy?

Section 523(a)(8) of the US Bankruptcy Code, at 11 U.S.C., excepts from discharge debts for "an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or an obligation to repay funds received as an educational benefit, scholarship, or stipend; or any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual" unless "excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents".

For the purpose of this paragraph, the definition of a qualifying education loan includes loans made solely to pay the higher education expenses of an eligible student, where the student is either the debtor, the spouse of the debtor, or the dependent of the debtor. In addition, the loans must be for study at a school that is eligible to participate in Title IV programs and where the student is enrolled at least half time. Loans that don't meet this definition, such as credit card debt, are still dischargeable even if they were used to pay for higher education expenses.

Thus FFELP and FDSLP loans, and education loans funded or guaranteed by private nonprofit organizations, are automatically non-dischargeable in a bankruptcy proceeding. The only cases in which they can be discharged through bankruptcy are:

• if the borrower files an undue hardship petition

and then it is up to the judge to decide whether the loan can actually be discharged. (The Higher Education Amendments of 1998 repealed the provision that allowed for the discharge of education loans that had been in repayment for 7 years. This affects all bankruptcy proceedings initiated after October 7, 1998, regardless of whether they involve loans incurred before that date.)

Section 220 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), P.L. 109-8, extended similar protections to "qualified education loans" starting on October 17, 2005, even when they are not funded or guaranteed by a nonprofit organization. Qualified education loans is defined to include any debt incurred by the taxpayer solely for the purpose of paying for qualified higher education expenses of the taxpayer, the taxpayer's spouse, or any dependent of the taxpayer. (Dependency is determined as of the time the taxpayer took out the loan.) Interestingly enough, most private student loan programs seem to have some sort of nonprofit involvement.

BAPCPA also made it more difficult to file under Chapter 7. If the borrower's income is above the median income in his/her state or is sufficient to repay 25% or more of his/her debt, the borrower will be forced to file under Chapter 13, which requires repayment over three to five years. BAPCPA also mandates credit counseling before a borrower can file for bankruptcy.

FinAid analyzed FICO score distributions before and after BAPCPA showing no appreciable increase in availability of private student loans. Some of this might be explained by the lenders believing that their loans were excepted even prior to BAPCPA. If so, why did the lenders push the BAPCPA changes based on arguments that it would increase the availability of private student loans?

It is worth noting that the extension of the bankruptcy exception to qualified education loans in 11 USC 523(a)(8)(B) cross-references IRC section 221(d)(1) for the definition of a qualified education loan. This section of the Internal Revenue Code requires the loan to be used "solely to pay qualified higher education expenses". IRC section 221(d)(2) defines qualified higher education expenses as:

The term "qualified higher education expenses" means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before the date of the enactment of this Act) at an eligible educational institution, reduced by the sum of --

1. the amount excluded from gross income under section 127, 135, 529, or 530 by reason of such expenses, and
2. the amount of any scholarship, allowance, or payment described in section 25A (g)(2).

So to qualify for this exception, the private student loan must be capped at the cost of attendance minus student aid, such as scholarships, and expenses paid for using amounts from employer tuition assistance, 529 college savings plans and prepaid tuition plans, US savings bonds and Coverdell education savings accounts. If a borrower were able to show that the loan exceeded the limits set by IRC section 221(d)(2), they might be able to argue that the loan was ineligible for bankruptcy protection and so should be subject to discharge. See IRS Tax Topic 456 and IRS Publication 970 for further IRS guidance on what types of expenses qualify, such as the requirement that the expenses must have been "paid or incurred within a reasonable time before or after you took out the loan" (per IRC section 221(d)(1)(B). IRS Publication 970 provides a safe harbor of 90 days before and after the academic period to which the expenses relate. Consolidation loans and other loans used to refinance a qualified education loan also qualify, provided that there was no cash out from the refinance (or that the cash out was used solely for qualified higher education expenses). Eligible student is defined by IRC section 25A(3) as a student enrolled at least half time in a degree or certificate program at a Title IV institution (per Section 484(a)(1) of the Higher Education Act of 1965).

More details and other limitations on the exception to discharge can be found in Limitations on Exception to Discharge of Private Student Loans.

Most court cases cite Brunner v. New York State Higher Education Services Corp. (October 14, 1987, #41, Docket 87-5013) for a definition of "undue hardship". That decision adopted the following three-part standard for undue hardship:

1. That the debtor cannot both repay the student loan and maintain a minimal standard of living based on current income and expenses.
2. That this situation is likely to persist for a significant portion of the repayment period of the student loans.
3. That the debtor has made good faith efforts to repay the loans.

The first element of the standard usually involves evaluating what the monthly payment would be under Income Contingent Repayment, as opposed to standard ten-year repayment. (With the introduction of Income Based Repayment on July 1, 2009, it is expected that the courts will switch to this repayment plan as it usually yields a lower monthly payment and meshes well with the 150% of poverty line threshold for a bankruptcy fee waiver.) Note that if the borrower has multiple student loans and could afford to repay some but not all of them, the court will generally discharge only those loans that exceed the borrower's ability to repay.

The poverty line is often used as a threshold for a minimal standard of living, since it is defined as the income level at which the family has no discretion concerning how to use the income. However, the courts will generally examine all of the debtor's expenses to ensure that they are minimal and necessary. The existence of discretionary expenses may derail an undue hardship petition.

The second element of the standard requires the debtor to provide evidence of additional exceptional circumstances that are strongly suggestive of a continuing insurmountable inability to repay, such as being disabled or having a disabled dependent. A serious physical or mental illness might also qualify. An inability to work in one's chosen profession does not necessarily preclude being able to work in another field.

The third element of the standard requires the borrower to have demonstrated a good faith effort to repay the loans. Filing for a bankruptcy discharge immediately after graduation is generally not considered a good faith effort to repay the loans. However, there might be extenuating circumstances, such as the debtor suffering brain damage in a car accident shortly after graduation. The court will consider the totality of the circumstances. The court will consider whether the debtor made payments on the loans when he or she had some income available and obtained a deferment or forbearance when his or her income was insufficient. The court will also consider whether the debtor took advantage of various alternatives to bankruptcy, such as the extended repayment, income-contingent repayment and income-based repayment plans.

A debtor could have a zero payment under the income-contingent or income-based repayment plans if the debtor's discretionary income is zero. Of the more than 600,000 borrowers repaying their federal education loans using the income-contingent repayment plan, more than 285,000 (45%) have a zero payment. This does not prevent an undue hardship discharge for federal education loans if the debtor is unable to maintain a minimal standard of living even with a zero payment and the situation is likely to persist for most of the life of the loans. But most often an undue hardship discharge is applied to private student loans which don't offer such generous repayment plans.

Even if a loan doesn't come under the non-discharge provision for student loans under the Bankruptcy Code, the debtor's petition would still be reviewed and could be denied on various other grounds, such as abuse of the bankruptcy laws.

34 CFR 685.212 describes the conditions for discharge of a loan obligation under the federal direct loan program, and includes the following statement on bankruptcy:

(c) Bankruptcy. If a borrower's obligation to repay a loan is discharged in bankruptcy, the Secretary does not require the borrower or any endorser to make any further payments on the loan.

Page 2-32 of the Federal Student Financial Aid Handbook states:

A student with an SFA loan discharged in bankruptcy is eligible for SFA grants, work-study, and loans. Prior to October 22, 1994, a student whose defaulted loan was discharged in bankruptcy could not receive loan funds unless the student reaffirmed the discharged debt and made satisfactory repayment arrangements. Because of legislative changes made by the Bankruptcy Reform Act of 1994, the reaffirmation requirement was lifted. Students no longer must reaffirm discharged loans before receiving new loans. In addition, if a student has a loan stayed in bankruptcy, he or she remains eligible for SFA funds as long as he or she has no loans in default (including the stayed loan) and as long as all other eligibility requirements are met.

Regardless of whether the education loan is dischargeable, the debtor should consider objecting to the claim of the holder of the loan in a Chapter 13 proceeding. This requires the creditor to provide an accounting of the amount owed and any additional charges and fees that were applied to the loan balance. Often lender records are in a state of disarray (especially if the loan has been sold) and it will be unclear how much is actually owed. The burden of proof is on the lender, not the debtor (although it is helpful if the debtor has cancelled checks and other records of payments made). The judge will then decide the amount that is properly owed.

Attempts to Repeal the Exception to Discharge

Several members of Congress have attempted unsuccessfully to ease the restrictions on bankruptcy discharge of private student loans. On February 7, 2008, an amendment to the Higher Education Opportunity Act of 2008 proposed by Rep. Danny K. Davis failed by a vote of 179 to 236, with 170 Democrats and 9 Republicans voting in favor and 52 Democrats and 184 Republicans voting against. This amendment would have allowed private student loans to be discharged after 5 years in repayment. It would also have closed a loophole whereby mere association of a for-profit loan program with a non-profit entity made a private student loan non-dischargeable even though the non-profit entity was not the source of funding for the loans. On June 7, 2007, Sen. Durbin introduced a bill, S.1561, to repeal the exceptions to discharge for private student loans. The bill was referred to the Committee on the Judiciary and was never reported out of committee. On February 7, 2007, Sen. Clinton introduced the Student Borrower Bill of Rights Act of 2007 (S.511). Among other provisions, the bill would have allowed new federal and private student loans to be discharged after 7 years in repayment. The bill was referred to the Committee on Health, Education, Labor and Pensions and was never reported out of committee.

Types of Bankruptcies

This section provides a short glossary of the different types of bankruptcies. As noted above, bankruptcy does not relieve you of the obligation of repaying your student loans. It also does not affect child support and alimony payments, and income tax obligations.

Chapter 7

• Complete liquidation of all personal assets to repay debts.

Chapters 11

• Reorganization bankruptcy in which a plan is filed with the court to repay creditors. Chapter 11 is used for debts in excess of $1 million and is used mainly by businesses.

Chapter 12

• A bankruptcy for family farmers.

Chapters 13

• Reorganization bankruptcy in which a plan is filed with the court to repay creditors. Chapter 13 is used for debts under $1 million and is used mainly by consumers.

back to the top

This Page has been currently rated as:

Rate this Page :    [ 2  votes]

© hscripts.com