Student Loans in The United States - Discharge of Student Loans

Discharge of Student Loans

U.S. Federal student loans and some private student loans can be discharged in bankruptcy only with a showing of "undue hardship." In contrast to credit card debt, which often can be discharged through bankruptcy proceedings, this option is not generally available for educational loan debt. The undue hardship standard varies from jurisdiction to jurisdiction, but is generally difficult to meet, making student loans practically non-dischargeable through bankruptcy. In most circuits discharge depends on meeting "The Brunner test:

As noted by the district court, there is very little appellate authority on the definition of "undue hardship" in the context of 11 U.S.C. § 523(a)(8)(B). Based on legislative history and the decisions of other district and bankruptcy courts, the district court adopted a standard for "undue hardship" requiring a three-part showing: (1) that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans. For the reasons set forth in the district court's order, we adopt this analysis. The first part of this test has been applied frequently as the minimum necessary to establish "undue hardship." See, e.g., Bryant v. Pennsylvania Higher Educ. Assistance Agency (In re Bryant), 72 B.R. 913, 915 (Bankr.E.D.Pa.1987); North Dakota State Bd. of Higher Educ. v. Frech (In re Frech), 62 B.R. 235 (Bankr.D.Minn.1986); Marion v. Pennsylvania Higher Educ. Assistance Agency (In re Marion), 61 B.R. 815 (Bankr.W.D.Pa.1986). Requiring such a showing comports with common sense as well.

While federal student loans can be discharged administratively for total and permanent disability, private student loans cannot be discharged outside of bankruptcy.

The rules for total and permanent disability discharge underwent major changes as a result of the Higher Education Opportunity Act of 2008. Loan holders are no longer required to be unable to earn any income, but instead the standard is "substantial gainful activity" (SGA) as a result of disability. The new regulations took effect July 1, 2010. Under further changes set to take effect July 1, 2013, if a borrower is determined to be disabled by the Social Security Administration, that determination will be accepted as proof of total and permanent disability if the SSA placed the individual on a five- to seven-year review cycle (the longest currently used by SSA).