Student Loans and Bankruptcy

Student loans are notoriously difficult to discharge in bankruptcy – but they are not impossible to discharge, and the landscape has changed substantially since 2022. For many South Florida clients, the right answer is not direct discharge but a combination of bankruptcy relief for other debts plus federal income-driven repayment programs for the student loans.

The Statutory Standard: Undue Hardship

Section 523(a)(8) of the Bankruptcy Code excepts most educational loans from discharge unless the debtor can establish that excepting the debt from discharge would impose an "undue hardship" on the debtor and the debtor's dependents. The "undue hardship" question is decided in a separate adversary proceeding filed within the bankruptcy case.

The Brunner Test (Eleventh Circuit)

The Eleventh Circuit, which covers Florida, applies the Brunner test: the debtor must prove all three of the following by a preponderance of the evidence:

1. The debtor cannot maintain a "minimal" standard of living for the debtor and dependents based on current income and expenses if forced to repay the loans
2. Additional circumstances exist indicating this state of affairs is likely to persist for a significant portion of the repayment period
3. The debtor has made good-faith efforts to repay the loans

Historically, this was a difficult standard to meet, and discharge cases were rare. The standard remains demanding, but case law has evolved to permit partial discharges and to apply the test more flexibly than the strictest early decisions.

The 2022 DOJ Adversary-Process Guidance

In November 2022, the Department of Justice and Department of Education issued joint guidance creating a streamlined process for resolving undue-hardship adversaries against federally-held student loans. Under the guidance, debtors complete an attestation form documenting present financial circumstances, future inability to pay, and good-faith repayment efforts. DOJ attorneys are directed to recommend discharge in cases satisfying the criteria.

The new process has substantially increased the rate at which federal student loans are discharged in bankruptcy adversaries – though it remains a more demanding process than discharge of garden-variety unsecured debt.

Federal vs. Private Student Loans

Federal student loans (Direct, FFEL, Perkins) are subject to the undue-hardship test but are also eligible for federal repayment programs that often work better than bankruptcy discharge:

• Income-Driven Repayment (IDR) plans capping payments at 10-20% of discretionary income
• SAVE plan (when available)
• Public Service Loan Forgiveness (PSLF) for borrowers in qualifying public-service employment after 120 qualifying payments
• Total and Permanent Disability discharge
• Borrower Defense to Repayment discharge for certain school-misconduct cases
• Closed School discharge

Private student loans are also subject to the undue-hardship test in bankruptcy, but they lack the federal repayment-program safety net. Importantly, private loans that did not finance "qualified educational expenses" at a "Title IV eligible school" do not fall within Section 523(a)(8) at all and are dischargeable as ordinary unsecured debt – a frequently-overlooked argument that has succeeded in cases involving bar-study loans, certain career-school loans, and similar products.

How Other Bankruptcy Tools Help With Student Loans

Even when student loans themselves are not discharged, a bankruptcy case improves the financial picture in ways that make student-loan repayment manageable:

• Chapter 7 discharges other unsecured debt, freeing up cash flow for IDR or PSLF payments
• Chapter 13 includes student loans in the plan as long-term debt; the automatic stay halts collection actions for the duration of the plan; payments inside the plan count toward Public Service Loan Forgiveness in many cases
• Tax debt, medical debt, and credit card debt can be wiped out, allowing focus on the federal student-loan repayment plan

Practical Strategy for Most Clients

For most Miami clients with significant student-loan debt, our typical approach is:

1. File Chapter 7 or Chapter 13 to discharge or restructure other debt
2. Enroll the federal student loans in an Income-Driven Repayment plan, where the monthly payment may drop to $0 if income is low enough
3. Consider a Section 523(a)(8) adversary against private student loans, particularly where the "qualified educational expense" argument applies
4. For federally-held loans where the borrower is in clear, lasting financial difficulty, evaluate the DOJ attestation process for direct discharge

Schedule a Consultation

To discuss the right strategy for your specific student-loan situation, call 786-522-1411 or email [email protected].