Does Foreclosure Impact Student Loan Eligibility?

Student loan eligibility generally relies on various factors of an applicant's profile, such as the student's level of undergraduate or graduate study, her dependence status and financial need. The foreclosure crisis in American has added another facet to student aid eligibility, as higher education students, and their co-signers struggle to finance an education after losing their home.

Higher education loans come in various shapes and sizes, from federal to private and need- and non-need-based. Student aid eligibility depends on the borrower's and any co-signer's financial profile, and often involves a credit check. The borrower's credit history, or FICO score, gives lenders a good idea of how willing and likely a student is to repay tuition debt. Borrowers or co-borrowers, such as parents, with a recent foreclosure, mortgage default or deed in lieu of foreclosure on their credit report may be denied a loan or pay more for one.

Need-based and non-need-based loans, such as the Perkins and Stafford loans, do not base eligibility on credit scores, according to NJ.com, a New Jersey-based news website. No credit check is required for the borrower or co-borrower on these types of federal student loans. Such federally guaranteed loans, "are popular because they offer fixed, below-market rates," according to a March 3, 2008, article in The Washington Post. Foreclosure and mortgage default reflected on a borrower's credit report does not jeopordize eligibility for Perkins and Stafford loan qualification.

Federal direct PLUS loans rely on credit history to determine eligibility. The loans, intended for graduate students and dependent undergraduate students, are not need-based. According to GradLoans.com, "A qualified Graduate PLUS Loan borrower does not have an adverse credit history." Adverse credit involves having 90 days or more delinquent debt. A credit report demonstrating default or foreclosure during the previous five years preceding the credit report date is ineligible for a PLUS Loan. PLUS loan eligibility relies on the activity reported on a credit report, rather than the FICO score itself, or debt-to-income ratios. Therefore, an applicant who has recovered financially and creditwise from a foreclosure is still ineligible for PLUS financing until she meets the five-year seasoning requirement, which also applies to deeds in lieu of foreclosure.

Private students loans are credit-based; therefore, someone with a recent foreclosure will likely have a problem obtaining financing. The housing crisis that began in 2007 catapulted a credit crunch, which has put many private student loan companies out of business. As of July 2011, 33 private student loans companies have stopped lending since 2007, and the rest have increased lending requirements, according to CNBC. As a result, students often require co-borrowers with strong credit qualifications -- generally above a 700 FICO score.

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