Discharging Federal Student Loans in Bankruptcy Just Became Easier 

Scott Waterman

Chapter 13 Trustee

When a Federal Court of Appeals blocked the Biden Student Loan Forgiveness Program in November 2022, many borrowers thought their chance to free themselves from burdensome student loan debt had disappeared.  However, just three days later new guidelines were issued making it easier and cheaper for debtors to discharge federal student loans in bankruptcy, changing the long-held belief that it was nearly impossible to discharge federal student loans in bankruptcy.  If a student loan borrower is having trouble making their monthly payment, bankruptcy may be an option. 

In most jurisdictions, to discharge a student loan the debtor needs to show that the debt imposes an undue hardship, and the loan can only be discharged if three conditions are satisfied: (1) the debtor presently lacks an ability to repay the loan; (2) the debtor’s inability to pay the loan is likely to persist for a substantial part of the repayment period; and (3) the debtor has acted in good faith in the past in attempting to repay the loan.

To discharge a student loan in bankruptcy a debtor must file an Adversary Action alleging the elements necessary to discharge the loan.  Historically, the Department of Justice has approached student loan discharge complaints with the intent to defeat the debtor.  The new guidelines establish objective benchmarks with certain presumptions that will aid the debtor, which, if met, can serve as a road map to discharging the loan.   

The first step is for a debtor to know the amount of the monthly student loan payment under a “standard” repayment plan.  A standard repayment amount is the payment amount required to pay the student loan within the remaining term of the loan.   Debtors can access that information by either going to the Department of Education website at www.studentaid.gov or by contacting their bankruptcy attorney who may have access to federal student loan portal through their bankruptcy software provider. 

The next step is to determine whether a debtor has the present ability to repay the loan.  To make that determination the debtor uses his or her current monthly income as reflected on Bankruptcy Schedule I and subtracts certain expenses set forth by the IRS for Collections Standards.  These are called the “National and Local Standards” and “Other Necessary Standards.”  Bankruptcy attorneys are familiar with these standards because they are routinely used in bankruptcy “Means Test” calculations to determine whether a debtor is eligible to file a Chapter 7 bankruptcy and or establish the minimum payments necessary in some Chapter 13 cases.

The new Student Loan Discharge Guidance is flexible enough to allow for special circumstances where actual expenses exceed the IRS Standards and can allow for additional expenses not actually incurred where a debtor is forgoing expenses just to meet basic needs (e.g., staying with a family member instead of renting an apartment).  If the debtor is unable to make a full standard repayment with the allowable expenses they may be eligible to discharge the debt.

The second factor for discharge is whether the debtor’s current inability to repay the debt while maintaining a minimal standard of living will likely persist for a significant portion of the repayment period.  A presumption that a debtor’s inability to repay debt will persist is to be applied in certain circumstances, including: (1) the debtor is age 65 or older; (2) the debtor has a disability or chronic injury impacting their income potential; (3) the debtor has been unemployed for at least five of the last ten years; (4) the debtor has failed to obtain the degree for which the loan was procured; and (5) the loan has been in payment status other than ‘in-school’ for at least ten years.

Finally, a debtor needs to demonstrate “good faith” with regard to repayment of the loan.    The following steps evidence good faith:

• making a payment;
• applying for a deferment or forbearance (other than in-school or grace period deferments);
• applying for an Income Driven Repayment Plan;
• applying for a federal consolidation loan;
• responding to outreach from a servicer or collector;
• engaging meaningfully with their loan servicer, regarding payment options, forbearance and deferment options, or loan consolidation; or
• engaging meaningfully with a third party they believed would assist them in managing their student loan debt.

In lieu of subjecting a debtor to a lengthy deposition and a barrage of Document Requests and Interrogatories to prove the elements of discharge the new Student Loan Discharge Guidance allow a debtor to submit an Attestation Form, which will substantially reduce litigation costs.

Finally, the new Guidance allow debtors to file a Dischargeability Action in a Chapter 13 Bankruptcy, which allows debtors to pay counsel fees over time, instead of in a lump sum which too often served as another barrier to discharge.

If student loan borrowers finds it difficult to pay their monthly student loan, they should inquire with a bankruptcy attorney to see if a bankruptcy discharge is a viable option.