Can Student Loans Be Discharged in Bankruptcy?

The short answer is: sometimes. The longer answer involves understanding a legal standard called "undue hardship," knowing what type of student loans you have, and being aware of recent changes that have made discharge more accessible than it has been in decades.

For years, the common belief has been that student loans are impossible to discharge in bankruptcy. That belief is wrong, but it is easy to see why it persists. The process is harder than discharging credit card debt or medical bills, and for a long time, courts applied such a strict standard that very few borrowers even tried. That landscape is shifting.

The Undue Hardship Standard

Unlike most other unsecured debts, student loans are not automatically discharged when you file for bankruptcy. To get them discharged, you need to file a separate legal action within your bankruptcy case called an adversary proceeding. In that proceeding, you must prove that repaying the loans would cause you "undue hardship."

Most courts in the Third Circuit, which includes Pennsylvania, use what is called the Brunner test to evaluate undue hardship. Under this test, you must show three things: that you cannot maintain a minimal standard of living for yourself and your dependents if forced to repay the loans; that your financial situation is likely to persist for a significant portion of the repayment period; and that you have made good-faith efforts to repay the loans.

Each of these prongs requires evidence. Pay stubs, tax returns, monthly expense breakdowns, medical records if health issues affect your ability to work, and documentation of any attempts you made to enter repayment plans or negotiate with your loan servicer all play a role.

Recent Changes from the Department of Justice

In late 2022, the Department of Justice issued new guidance that changed how the federal government handles student loan discharge cases in bankruptcy. Under the new approach, DOJ attorneys evaluate borrowers using a set of specific factors rather than automatically opposing every discharge request.

These factors include the borrower's age, income, expenses, work history, and whether they have tried to access income-driven repayment plans. The DOJ may now agree to full or partial discharge, or recommend terms that reduce the borrower's obligation, rather than fighting the case.

This is a meaningful shift. When the federal government does not oppose discharge, courts are more likely to grant it. Early results suggest more borrowers are succeeding in these cases than in prior years.

Federal vs. Private Student Loans

The type of student loan matters. Federal student loans, those issued directly by the government or under the Federal Family Education Loan Program, are subject to the undue hardship standard described above.

Private student loans are a different story. Some private loans may not qualify for the same protections that make federal loans hard to discharge. If your private loan does not meet the legal definition of a "qualified education loan," it may be dischargeable like any other unsecured debt. This is a fact-specific determination that depends on the loan terms, the institution, and how the funds were used.

If you have private student loans and are considering Chapter 7 or Chapter 13 bankruptcy, bring your loan documents to your consultation. The details of the loan agreement matter.

What Bankruptcy Can Still Do for Student Loan Borrowers

Even if your student loans are not discharged, filing bankruptcy can still improve your situation significantly. Bankruptcy eliminates other debts, credit cards, medical bills, personal loans, which frees up income to put toward your student loan payments.

In a Chapter 13 case, student loans can be included in the repayment plan. While the debt may not be fully discharged at the end, you get the benefit of an organized repayment structure while other debts are being addressed.

The automatic stay that goes into effect when you file also stops collection activity on student loans temporarily. If your wages are being garnished or your tax refunds are being seized, filing bankruptcy gives you breathing room to sort out your options.

Is It Worth Trying

Whether to pursue student loan discharge in bankruptcy depends on your specific circumstances. If you are older, have a disability, have been unable to work in your field of study, or have loans that vastly exceed your earning capacity, the undue hardship argument may be strong.

If your income is low and is unlikely to increase, the Brunner test factors work in your favor. If you have made attempts to repay or enroll in income-driven repayment plans that still leave you unable to cover basic expenses, that demonstrates good faith.

The risk of trying is relatively low. If the court denies the discharge, you are no worse off than before. The student loans remain, but your other debts may still be eliminated through the regular bankruptcy process.

At our office, we evaluate each client's student loan situation individually. There is no one-size-fits-all answer, but there are far more options available today than most borrowers realize. If student loan debt is part of your financial burden, it is worth discussing during your free bankruptcy consultation.