Yes, your student loans can be discharged in bankruptcy, but it’s not guaranteed

The national debate about student debt continues in the wake of the Supreme Court's decision to strike down President Biden's one-time student loan forgiveness plan.

One claim frequently mentioned on social media is a belief that student loans cannot be discharged through bankruptcy, a legal process designed to give people who can no longer pay their debts a fresh start. 

THE QUESTION

Can your student loans be discharged in bankruptcy?

THE SOURCES

• National Consumer Law Center (NCLC)
• United States Bankruptcy Court for the Western District of Washington
• Federal Student Aid, which is operated by the U.S. Department of Education
• Consumer Financial Protection Bureau (CFPB)
• Experian, one of the major national credit reporting bureaus

THE ANSWER

Yes, your student loans can be discharged in bankruptcy, but it’s not guaranteed

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WHAT WE FOUND

It’s difficult, but not impossible to discharge both federal student loans and private student loans in bankruptcy, the National Consumer Law Center (NCLC) says. But the borrower seeking bankruptcy often has to initiate extra steps and prove undue hardship to be able to do so.

The process for discharging federal student loans is different from the process for discharging certain private student loans. Bankruptcy courts consider federal student loans to be all loans held by the U.S. Department of Education (DOE), which includes all Direct Loans, FFELP (Federal Family Education Loan Program) and Perkins loans that are held by the government as federal student loans, the United States Bankruptcy Court for the Western District of Washington says. You can check if your student loans are federal or private by logging into studentaid.gov.

How can I discharge federal student loans in bankruptcy court?

In the case of federal student loans, you have to file a petition for something called an adversary proceeding as part of the bankruptcy case to have a chance at getting the loans discharged, the NCLC says. You must show the student loans are causing you or will cause you undue hardship before the court will agree to discharge the loan.

There is no single test to determine undue hardship, the DOE’s Federal Student Aid website says, and instead that determination is up to the court for each bankruptcy case. But Federal Student Aid says the following three factors make it more likely the court will determine you face undue hardship:

• You would not be able to maintain a minimal standard of living if you were forced to repay the loans

• There is evidence this hardship will continue for a significant portion of time

• You’ve made good faith efforts to repay your loans before filing for bankruptcy

For example, the NCLC says a college-educated married couple was able to prove undue hardship and discharge their student loans in bankruptcy court by showing the court that they worked steadily, maintained a frugal budget and tried to pay their loans through an affordable repayment plan, but were still unable to meet their basic expenses.

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The DOJ represents the government during adversary proceedings, and will recommend for the judge to give you a full or partial discharge of your student loans if it agrees you face undue hardship, the NCLC says.

If the court agrees that your federal student loans will cause you undue hardship, Federal Student Aid says it will offer you relief in one of three ways:

• A full discharge of your loans, meaning all collection activity will stop and you will not have to repay any remaining portion of your loans

• A partial discharge of your loans, meaning you will still have to repay some portion of your loans

• A change of terms to your loans so they’re easier to pay, such as reducing the interest rate on your loans. You must still repay all of your loans in this scenario

You can file an adversary proceeding to discharge your student loans in both Chapter 7 and Chapter 13 bankruptcies, Experian, one of the major national credit reporting bureaus, says.

Judges grant student loan discharges for undue hardship to nearly 40% of debtors who go through the adversary proceeding process, but only 0.1% of student loan debtors who have filed for bankruptcy attempt to discharge their student loans, according to a study published in the American Bankruptcy Law Journal.

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How can I discharge private student loans in bankruptcy court?

Private student loans can also be discharged in bankruptcy cases. In fact, some private student loans can be discharged without the extra step of proving undue hardship, the Consumer Financial Protection Bureau (CFPB) says.

“Instead, some private loans for educational purposes can be discharged in a normal bankruptcy proceeding, just like most other consumer debts,” says the CFPB.

The portion of private student loans that can’t be discharged in a normal bankruptcy proceeding must instead be discharged the same way federal student loans are discharged — by proving undue hardship through an adversary proceeding.

According to the NCLC, there are 10 conditions that must apply to a private student loan for it to qualify for the undue hardship standard in bankruptcy cases:

• The loan is used to attend a “qualified educational institution,” all of which are listed on the DOE’s Federal School Code List
• The loan must be used exclusively to pay for education expenses, which include tuition and fees, room and board, books, supplies, equipment and other necessary expenses, such as transportation
• The loan must be paid within 90 days before or after an academic period, or within a provably reasonable time to the payment of educational expenses
• The student must be enrolled in school at least half-time at the time they received the loan
• The student must be in courses leading to a degree when they received the loan
• The student cannot be undocumented at the time they received the loan
• The student cannot be incarcerated at the time they received the loan
• The student must be eligible for Higher Education Act Title IV funding at the time they received the loan
• The borrower must either be the student, the student’s spouse or someone who claims the student as a dependent
• The borrower must be a taxpayer

If even one of the 10 conditions doesn’t apply, then the private student loan is treated like any other debt in bankruptcy court, and is eligible to be discharged without any extra steps. If all 10 conditions apply, then the borrower can only get the private student loan discharged by proving it would cause them undue hardship, just as the borrower would have to do for a federal student loan.

The CFPB says private loans made to cover fees and living expenses incurred while studying for professional exams like the bar exam, or made to cover fees and living expenses for a medical or dental residency are not subject to the undue hardship standard. Another example of a private student loan that wouldn’t be subject to the undue hardship standard is one that provided more money than the cost of attendance.