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Why You Generally Can’t Discharge Student Loans

If there is one thing you know about your student loans it is probably that you can’t just get rid of them in bankruptcy. It has been widely spread that it is very difficult to discharge student loans, but do you know why?

Bankruptcy Rules – Ability to Discharge Student Loans

Looking at the actual code section addressing student loans, it states that “undue hardship” is the only instance where student loans might be able to be discharged. It reads:

11 USC § 523 – Exceptions to Discharge:

……

(8)unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—

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(A)(i)an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii)an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B)any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;

Unfortunately, the code does not define what constitutes “undue hardship” so it has been left up to the courts. There are two prevailing tests, different courts may rely on either depending on where they are located.

The Test for Determining “Undue Hardship”

Currently, different courts have taken different approaches to defining “undue hardship”

The Brunner Test

Some (not all courts) have adopted what is called the Brunner test (from Brunner v NY State Higher Education Serv. Corp) for determining “undue hardship” The test:

“(1) the debtor[s] cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for [themselves and 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[s have] made good faith efforts to repay the loans.”

In re Long

Other courts look to the In re Long case (In re Long, 322 F.3d 549, 554 (8th Cir. 2003) to apply a “totality of the circumstances” test that looks to:

“(1) the debtor’s past, present and reasonably reliable future financial resources;

(2) a calculation of the reasonable living expenses of the debtor and her dependents; and

(3) any other relevant facts and circumstances.”

These can both be difficult tests to pass, which is why the general rule of being unable to discharge your student loans is so well known.

What About All the Lawsuits in the News

There have been more and more instances of people with student loan debt suing their schools to discharge their debt. These cases haven’t been pursuing the ability to discharge their loans through bankruptcy but rather on claims of fraud committed by the school.

Thus far there has really only been one instance of success in the case of Corinthian College a for-profit college. Corinthian ended up closing, the result of which was the government coming up with a process for students who have been defrauded by their colleges to have their loans forgiven.

Personally, I think this should lead to (though has yet to be seen) more oversight in the cost of attending college. The schools have been largely left unchecked in raising tuition rates exponentially, relying on federal funding of student loans.

Hopefully, we will see reform not only in student loan repayment (hello refinancing) but also in the disbursement of loans as well.

Any Other Way I Can Get Rid of My Loans

You can look into public service student loan forgiveness. Unlike other repayment plans, many public service student loan forgiveness plans do not tax the forgiven amount.

While there is some loan forgiveness in various flexible repayment programs (income based repayment for example), none of these programs have been around long enough to see what that would look like at the end of the repayment schedule. As it stands now, the forgiven amount in those flexible repayment plans would be considered taxable income.

If you have federal student loans and are struggling with your payments, consider utilizing an income-driven repayment plan at least temporarily.

If you have private loans or your debt to income ratio allows, consider refinancing with a company like SoFi. I wrote a review about my experience refinancing my bar loan with SoFi. Refinancing with SoFi ended up saving me over $1k. Use one of my links to refinance and you’ll get a $100 bonus. 

Wrapping it Up with a Bow on Top

While it is extremely difficult to discharge student loans in bankruptcy, there are other payment options available. Who knows, maybe one day the laws will change and we’ll all have more options with our student loans. Like refinancing federal loans or making the forgiven amount actually forgiven and not taxable income. Fingers crossed. For now, it’s really tough to discharge your student loans in bankruptcy.

Any questions about why you generally can’t discharge student loans? Let me know in the comments!

Money tools & resources i recommend

SoFi (for refinancing) If you have private loans or your debt to income ratio allows, consider refinancing with a company like SoFi. Learn more about what it's like to refinance with Sofi. Refinancing my bar loan with SoFi ended up saving me over $1,000. Use my link to refinance your student loan and you'll get a $100 bonus.

Chime (for saving) works by starting a spending account (takes 5 minutes) and opting into the automatic savings plan. (Learn more about getting started with Chime).  Every time I use the Chime Debit Card it rounds up my purchase to the nearest dollar and puts in in savings. Right now they also offer a double round-up bonus on those savings. All those withdrawals add up over time. Chime is free to use, with no monthly fees. With Chime, you end up saving money without having to think about it.

Qapital (for building savings & reaching money goals) Qapital can help you reach savings goals. Once you have the Qapital App installed and a bank account (or in my case three) connected you set up a goal or goals.  Then you set savings rules for each of your goals. For example, I have a round up to the nearest $2 rule, a guilty spending rule -when I buy Dominos. Qapital is free to useBonus, when you use my link you'll get $5 after your first savings.

Qoins (for debt repayment) When you sign up for Qoins, you connect your bank account and then spend as you normally would. Qoins will round up your purchases to the nearest dollar and put that change towards an extra debt payment. Learn more on How Qoins Can Help You Pay Off Debt Faster

Liz

Liz is a blogger helping people with personal finance and working for themselves. She shares her own journey to debt freedom and helps graduates dealing with above average student loan debt on her site, Less Debt More Wine. She currently resides in NC after calling Massachusetts home for nearly a decade.

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