The National Center for Education Statistics found that 38% of incoming undergraduate students took out federal student loans in 2020. Many who complete some college find that their loan debt is an overwhelming financial burden. Some may even consider bankruptcy to gain relief.
The relationship between student loans and bankruptcy is complicated. Borrowers should understand how bankruptcy deals with student loan debt.
Challenges of student loan forgiveness
Student loans are generally considered non-dischargeable debts in bankruptcy. Bankruptcy may remove some debts, such as credit card balances or medical bills. Student loan borrowers may not receive relief through bankruptcy.
Undue hardship exception
It is not impossible to discharge student loans through bankruptcy. Courts have tests to find out if borrowers will experience undue hardship if they have to repay their student loans. These tests require a separate legal process within the bankruptcy case.
The Brunner test is a common undue hardship test in student loan cases. Borrowers should show that repaying their loans would prevent them from maintaining a basic standard of living. They also have to prove that their financial situation is unlikely to improve and that they have attempted to repay their loans. Courts expect borrowers to present substantial financial evidence, including income, expenditures and future income prospects.
Alternative debt relief options
If borrowers cannot discharge their student loans through bankruptcy, they should consider other strategies. Federal loans offer income-driven repayment plans and loan forgiveness programs. Borrowers can also negotiate payments with their lenders. In addition, some state laws make it easier to discharge private student loans.
The laws and court decisions concerning student loans and bankruptcy have changed over time. Borrowers should stay updated to determine whether they could pursue a bankruptcy discharge in the future.