Bankruptcy and student loan debt

The Legal Point

The national student loan debt increases each year. Members of our community are forgoing financing a home, saving for retirement or having children because they cannot afford these steps while managing their student loans. Currently, the default bankruptcy rule is that the bankruptcy process will not wipe away the debtor’s obligation to pay his/her student loans. In bankruptcy lingo, we say that student loan debts are nondischargeable.

The winds of change are pushing Congress to make changes regarding student loans. These changes will help members of our community. Changes to the bankruptcy rules would be the best way to impact student loan debt. To give some context to these changes, I have written this overview of changes student loans have undergone over the past 60 years.

The federal government began offering student loans in 1958 through the National Defense Education Act (NDEA). The NDEA was a part of the United States government support of science, foreign language and mathematic to help the United States compete in the space race. During this time, student loan debtors could discharge the debt through a bankruptcy.

In 1965, U.S. Congress passed the Higher Education Act, which provided students attending state schools with low-interest student loans. A section of the Higher Education Act prevented a debtor from discharging the debt in a bankruptcy unless the debtor proves either of the following: (i) more than five years had passed since the debtor entered repayment or (ii) not discharging the loan would cause the debtor and his dependents undue hardship.

A few years later, U.S. Congress passed the Bankruptcy Reform Act of 1978. Section 523 included a list of debts that are nondischargeable, which included federal student loans. In 1978, however, only federal student loans were nondischargeable. Since then, Congress has widened its definition of student loans. The most notable widening was in 2005 when Congress included private student loans as nondischargeable.

The bankruptcy rules include a provision stating that if a debtor can show undue hardship, then the court can discharge the student loan debt. Congress never defined the term undue hardship. Bankruptcy courts have developed their own definition. The test for undue hardship is where the debtor can show he/she cannot pay the student loans obligation and maintain a minimal standard of living, the situation will last for a good portion of the repayment period and the debtor has made a good faith effort to pay the loan. Very few bankruptcy courts have ever found that the debtor has proved these elements. Therefore, it is very, very difficult — nearly impossible — for a debtor to have his/her student loan debts discharged through a bankruptcy.

If Congress were to change its definition of student loans that are nondischargeable, then it would offer some relief to people suffering under their student loans. Congress could make a small change, like allowing the bankruptcy rules to treat private student loans as it treats credit card debt and medical debt — as dischargeable through the bankruptcy process. Private student loans make up about 8 percent of the national student loan market. On the other hand, Congress could make a bolder choice by making all student loan debt dischargeable in a bankruptcy. Or, alternatively, Congress could define undue hardship with a less stringent test, allowing some people in a bankruptcy to discharge their student loans. Any of these options would be a step forward in helping our community.

If you have any questions about your student loan debt or other types of debt, contact an attorney for

About Angela M. Haen 3 Articles
Angi Haen is an attorney whose practice focuses on helping clients resolve financial difficulties, including bankruptcy filings, negotiation of tax debt, preventing judgments, stopping garnishments and halting foreclosures. She can be reached at or 757-357-1223.

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