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The Truth About Student Loan Bankruptcy Discharge

Student loans may be discharged if the borrower can prove the loan causes undue hardship. (Getty Images)

If you’re overwhelmed by debt and can’t make ends meets, bankruptcy may seem like a way out. However, you may have read or heard that student loans can’t be discharged in bankruptcy and that the debt will follow you to the grave.

It’s true that there’s generally a higher threshold to cross if you want to discharge student loan debt in bankruptcy, but some borrowers have crossed it. And there are a few circumstances when the exceptions could apply to you as well.

Student Loans May Be Dischargeable if They Lead to Undue Hardship

Since Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, both federal and private student loans are more difficult to discharge in bankruptcy than other types of debt. However, they can still be discharged if the borrower can prove the loan causes undue hardship.

Joshua R.I. Cohen, an attorney based in West Dover, Vermont, who specializes in student loan cases, says undue hardship can be defined in various ways, but borrowers often need to pass the Brunner test, based on a 1987 federal court decision. The test has three prongs, and you must prove that:

  • You can’t maintain a minimal standard of living for yourself and your dependents based on your current income and expenses.
  • Your financial situation isn’t likely to change during your loan’s term.
  • You’ve made good faith efforts to repay the loan.

If you can prove all three circumstances apply to you, then your student loan may be dischargeable. But proving an undue hardship can be difficult, particularly if you have federal student loans.

Your Case Could Depend on Whether You Have Federal or Private Student Loans

Federal student loans include direct loans, Perkins loans and the discontinued Federal Family Education Loan Program.

All nonfederal loans are considered private student loans. Banks, credit unions, online lenders, schools and states may issue private student loans.

Cohen says one of the key differences between private student loans and federal student loans in relation to bankruptcy is that federal student loan borrowers may be able to make payments using an income-driven repayment plan, or IDR.

IDR plans base your monthly payment on your income, family size and where you live. In some cases, your monthly payment could be as low as $0. And any remaining loan balance will be forgiven after you’ve made payments on an IDR plan for 20 to 25 years.

“The reason a lot of people lose (their case) is because of IDR,” says Cohen. “People think since they’re broke and can’t pay their rent they’re a shoo-in, but your payment could be $0.” And because a $0 monthly payment wouldn’t affect your standard of living, you may fail the first prong of the Brunner test.

On the other hand, private student loans don’t offer IDRs, and you may not be able to lower your monthly payments for an extended period. Therefore, it may be easier to prove that the loan is causing an undue hardship.

Some federal student loan borrowers could still have a case, though. For example, Cohen says a working middle-class family could make enough money to owe $300 to $500 a month with an IDR. However, “depending on where you live, it’s hard to survive while paying for a mortgage, vehicle, family health insurance and other normal expenses,” he says. “They don’t have luxuries; they just can’t afford everything.”

Examine Your Budget and Job Prospects to Determine if You May Have a Case

Whether you have federal or private student loans, closely look over your budget before you contact an attorney. Cohen says a budget is one of the first things he examines before agreeing to take on a new client, as it can make or break a case.

As you review your budget, think about how the courts and opposing side will view your efforts to find paying work and control your expenses in relation to your claim of undue hardship.

Large and small expenses could be scrutinized. “They may even look over your bills to see if you have a Starbucks habit and use that as evidence that you could tighten your budget and afford payments,” says Cohen.

You could also lose your case because you’re following generally good financial advice, such as saving for retirement. “But you don’t have a legal right to put aside money for retirement,” says Cohen. The judge may feel that you can put your retirement contributions toward loan payments instead.

Regarding income, the court may consider whether you looked for additional work, even if it’s outside your chosen career path and unrelated to your degree, in an attempt to afford loan payments.

The court may also try to determine whether you’ll be able to afford payments in the future, a component of the second prong of the Brunner test. You may need to prove that there are extenuating circumstances, such as major health problems, that will prevent you from working in the future.

Overall, passing the three prongs of the Brunner test can be difficult unless you’re in dire circumstances. But it is possible.

Some Private Student Loans May Be Exempt From the Undue Hardship Requirement

The need to prove undue hardship only applies to certain types of student loans: federal student loans, student loans that are funded by a nonprofit such as your school and qualified educational loans.

However, some private student loans may not fit the definition of a qualified loan, and therefore could be treated just like other types of unsecured debt during a bankruptcy.

Austin Smith of the Smith Law Group in New York specializes in these types of private student loan bankruptcy cases. He says there are three basic scenarios that could help you determine if your loan might not be a qualified educational loan.
  • You attended an ineligible school. Private student loans must be used at a Title IV-certified school – one with federally approved accreditation – to be considered qualified educational loans. If you’re weren’t eligible to borrow federal loans, then your school wasn’t Title IV-certified.
  • You borrowed more than the school’s cost of attendance. Qualified student loans can only be used for eligible educational expenses, such as tuition, fees, room, board and educational supplies. However, the most you can borrow is your school’s cost of attendance, as determined by the school, minus the other financial aid you’ve received. If you were allowed to borrow more than this, then the entire loan might not be considered a qualified student loan.
  • You weren’t an eligible student. Qualified educational loans can only be issued to eligible students, which generally requires you to take at least a half-time course load. If you borrowed money but didn’t have at least a half-time schedule, the loan might not have been a qualified educational loan.

You may be able to get private student loans discharged through bankruptcy if you fall into one of these categories. However, Smith says this interpretation of the law is also relatively new, and some bankruptcy attorneys may not be familiar with it. “But don’t take no for an answer right off the bat,” he says. “It may be worth your time and energy to find someone who can help you.”

What to Consider Before Declaring Bankruptcy

While bankruptcy may be an answer for some in financial trouble, including some student loan borrowers, it can be a long process. “It’s hard to give an exact timeline,” says Cohen, “but from my personal experience, six to eight months is generally the quickest.”

In addition, you’ll need to come up with a way to pay the attorney’s fees. Although some attorneys offer interest-free financing, Cohen says many people have benefactors, such as family members, who can help them pay the attorney and whose assets aren’t considered in the bankruptcy case.

Even so, the fees you may have to pay could be much less than you currently owe. And if you’re feeling stuck and hopeless due to your student loans, bankruptcy may be an avenue worth investigating.


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