Generally, private student loan borrowers have fewer options for managing their debt than federal loan borrowers. Private student loans that don't meet the definition of "student loan" in the Bankruptcy Code can be discharged. All others must been the undue hardship test.
Higher education is expensive. At the end of 2021, U.S. student loan debt peaked at $1.74 billion. That number includes private and federal student loans. But federal student loan borrowers have options when hard times hit. Repayment plans, forbearance, or deferment can help. These options can lower monthly payments or pause loan payments. Private student loan borrowers rarely have such options. This leads some people to wonder if bankruptcy is the solution to deal with overwhelming private student loan debt.
Generally, student loan debt can’t be discharged in a Chapter 7 or Chapter 13 bankruptcy case. It can only be discharged by filing an adversarial proceeding after filing your bankruptcy case. Then you have to prove the debt causes undue hardship using the Brunner Test. This sets a high bar, but there’s some evidence that filing bankruptcy to discharge student loans is becoming easier. Read on to learn more about how to deal with private student loans you’re struggling to repay.
What Is a Private Student Loan?
Private student loans are issued by private lenders like banks or other financial institutions. Navient and Sallie Mae are two common private student loan lenders. To be considered a qualified education loan — instead of a personal loan — the loan must be used solely for “qualified higher education expenses.” This includes the cost of attendance at any eligible educational institution.
Let’s break this down:
Cost of attendance includes tuition, fees, room and board, books, necessary equipment and materials, supplies, and transportation.
Eligible education institutions include most accredited public and private post-secondary institutions, including those that are for-profit. Put simply, most colleges and vocational institutions are eligible, accredited institutions.
If you default on a private student loan, the lender is out of luck. By contrast, federal student loans are issued by the U.S. Department of Education and guaranteed by the federal government. That means that if you default on these loans, the federal government pays for the loan.
Students often take out a mix of federal student loans and private student loans to cover their full college expenses.
Can Student Loans Be Discharged in Bankruptcy?
Student loan debt is unsecured debt just like credit card or medical debt. While credit card and medical debt can be discharged in a Chapter 7 bankruptcy, private and federal student loan debt are treated differently. This is outlined in the federal bankruptcy law known as the Bankruptcy Code.
To discharge a student loan in bankruptcy, you must first file your bankruptcy case, then file an adversary proceeding (AP) with the bankruptcy court. These proceedings are very different from normal bankruptcy proceedings. Most bankruptcy cases aren’t heard before a judge, but an adversarial proceeding may require a full trial before a bankruptcy judge. This is why many people who try to discharge their student loans hire experienced bankruptcy attorneys to help with their cases. Even if you file an AP, you’ll need to pass the Brunner Test to secure a bankruptcy discharge for a student loan (in most jurisdictions).
The Brunner Test
In most courts in America, you need to pass the Brunner Test to discharge a student loan. The Brunner Test was originally created by the court in a case called Brunner v. New York State Higher Education Services Corp. The Brunner Test is the standard courts look at to make a decision on student loan dischargeability in bankruptcy. All states and territories in the U.S. use the Brunner Test in their bankruptcy courts, except the following:
Maine, Massachusetts, New Hampshire, Rhode Island, Puerto Rico, Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Missouri, and Arkansas.
There are three parts to the Brunner test to help the court determine if an undue hardship exists. The most common way of passing the BrunnerTest is to be permanently disabled.
Part 1: Minimal Standard of Living
To pass the first part of the Brunner Test you must prove you have extenuating circumstances that create a hardship. In other words: You can't pay the student loan and still maintain a minimum standard of living. Different courts across the country have different ways of deciding what a minimal standard of living is.
One example is a case known as In re Murrell. In that case, the court basically said that the minimal standard of living requirement is met when a person's income is as high as it can be and their expenses are as low as they can be. This is a tough standard. In this case, a disabled debtor's student loans weren’t discharged because his expenses were too high. Those expenses included DirecTV and internet.
Part 2: Hardship Persists for a Substantial Portion of the Repayment Period
If you pass the first part of the test, you then have to prove that your hardship will continue for most of the loan’s repayment term. As you might imagine, it can be difficult to predict how long a bad financial situation will persist. To complicate matters, courts interpret hardship differently.
For example, a New Orleans court ruled that a debtor must be permanently unable to pay the debt because of reasons out of their control. But a Los Angeles court was less strict. It ruled that the debtor had to be unable to pay for most of the repayment period. Both of these courts apply the BrunnerTest to interpret the same part of the Bankruptcy Code. Yet, they have different interpretations. Your local bankruptcy court will have its own interpretation.
Part 3: Good Faith Effort To Repay the Student Loan
The final hurdle in the Brunner Test is showing that you’ve made a “good faith effort” to repay your educational loans. Like the second part of the test, bankruptcy courts interpret this differently. Some are more strict than others. As a general rule, most courts want to see that you’ve at least made an effort to find employment, maximize your income, and minimize your expenses. If you haven’t made any student loan payments or attempted to negotiate a repayment plan, some courts don’t consider you to have made a good faith effort.
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Are Bankruptcy Courts Evolving on Student Loan Bankruptcy?
There are reasons to be optimistic about recent developments in bankruptcy courts as well as recent legislative proposals. For example, in 2019, Senator Warren and Congressman Clyburn introduced the Student Loan Debt Relief Act. If this legislation becomes law, it would provide debt relief for 95% of student loan borrowers. The act would eliminate all debt for 75% of student loan borrowers. Student loan debt is a part of the political conversation now more than ever. But Congress has been slow to act outside of the temporary student loan payment pause implemented during COVID-19.
Recent Student Loan Bankruptcy Success Stories
Two of the most important student loan bankruptcy successes in the last few years have involved attorneys who personally filed for bankruptcy. These debtors knew the law and they were highly motivated to get their debt discharged. Each had approximately $200,000 on the line.
Rosenberg v. N.Y. State Higher Education Services Corp. was a student loan bankruptcy case filed by an attorney who got his educational loans successfully discharged. The judge in the case, Judge Morris, stated in the court ruling that she "would not participate in perpetuating the myth that student loans are impossible to discharge in bankruptcy."
Nitcher v. Educ. Credit Mgmt. Corp.is another successful student loan bankruptcy case. In this case, the judge granted a partial discharge to the attorney who filed the case. The attorney graduated from law school in 2008 and passed the Brunner Test because she had difficulty finding a job after graduating from law school. When she did find a job, she didn't make as much money as she had expected. The judge granted her a partial discharge so that her student loan was reduced from $198,681 to $16,500.
Student Loan Repayment With Private Lenders – What if You Can’t Pay?
While private lenders tend to have fewer options than federal student loan providers to help borrowers repay their loans, it’s always worth calling to see what your options are. Federal student loan borrowers often have access to income-based repayment plans, loan forgiveness or cancellation for work in certain nonprofit jobs, or forbearance or deferment. As a private student loan borrower, you’re unlikely to have access to these kinds of debt relief, but there are other options. As a private student loan borrower, you’re unlikely to have access to these types of debt relief, but there are other options.
Though student loan forgiveness isn’t an option, you can try to refinance your loans to lower your interest rate and/or monthly payment. You can also try to negotiate a debt settlement to pay less than the full amount you owe. But to be successful with a debt settlement, you may need to be able to offer a large lump-sum payment.
If you’re also struggling with credit card debt or other debt in addition to your student loans, you may want to schedule a free consultation with a credit counselor to help get your finances in order. While this isn’t a way to get rid of your student loans or other debt, it can help you set a budget and manage your personal finances better. Remember, if you miss student loan payments or default on your loans, it will reflect negatively on your credit report and hurt your credit score. That’s why it’s a good idea to make a plan sooner rather than later.
All things considered, private student loans can be harder to manage than federal loans. Private lenders that issue these loans don’t offer many options to borrowers who are struggling to repay their loans. It’s always worth contacting your lender if you’re unable to make your loan payments. You can try to refinance the loan or negotiate a debt settlement to deal with the loan directly. Or you can meet with a credit counselor to help you organize your personal finances and budget to tackle your debt.
Bankruptcy may also be an option. In the past, it’s been difficult for bankruptcy filers to pass the high bar of the Brunner Test to get their student loan debt discharged in bankruptcy. But there is recent evidence that courts may be relaxing this high standard a little.
- FRED, Federal Reserve Bank of St. Louis; . (2022, February). Student Loans Owned and Securitized [SLOAS]. Retrieved March 21, 2022, from https://fred.stlouisfed.org/series/SLOAS#
- (n.d.). Brunner v. New York State Higher Education Services, Corp., 831 F.2d 395 (2d Cir. 1987). Retrieved from https://scholar.google.com/scholar_case?case=5270362258430051298&q=831+F.2d+395&hl=en&as_sdt=806
- (n.d.). In re Murrell, 605 B.R. 464 (Bankr. N.D. Ohio 2019). Retrieved from https://scholar.google.com/scholar_case?case=9558048916141448415&q=605+B.R.+464&hl=en&as_sdt=806