Private student loans are loans extended by private lenders that are not backed by the federal government. This article will cover the limited relief methods available for private student loans. The article will also discuss dischargeability challenges in a bankruptcy filing.
Written by Attorney John Coble.
Updated August 28, 2020
Private student loans are loans extended by private lenders that are not backed by the federal government. These loans are only to be used for qualified educational expenses. Private student loans don't have many of the relief provisions allowed for by federal student loans. There are rarely any income-based repayments, forbearances, and deferments made available when debtors repay these loans. This article will cover the limited relief methods available for private student loans. The article will also discuss dischargeability challenges in a bankruptcy filing.
What Is a Private Student Loan?
Federal student loans such as Stafford Loans and Plus Loans are guaranteed by the federal government. That means that if you default on these loans, the federal government pays for the loan. By contrast, if you default on a private student loan, the lender is out of luck. To be considered "student loans" the debts must be used solely for qualified higher education expenses.
Qualified higher-education expenses are the "cost of attendance" at an "eligible educational institution." Eligible educational institutions include almost all accredited public and private, including for-profit, post-secondary institutions. That is, virtually all post-secondary (after high school) institutions such as colleges and vocational institutions.
The "cost of attendance" includes tuition, fees, room, board, books, necessary equipment and materials, supplies, transportation, and even personal computers. For most students, federal student loans will only cover a portion of their necessary expenses. The student may need extra money for room, board, supplies, etc. To cover these additional expenses, students take out private loans on top of their federal student loans.
Student Loan Repayment with Private Lenders – What if You Cannot Pay?
Federal student loans include many provisions to help borrowers repay their loans. These features include income-based repayment plans, loan forgiveness for work in certain jobs, as well as opportunities for forbearance, and deferment. Private student loans do not generally provide these kinds of relief. Private student loans operate like any other loans from a bank or other financial institution. If you can't pay on time, the private institutions will engage in collection activities against you.
Note that the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) suspends payments for federal student loans until September 30, 2020. Unfortunately, the CARES Act doesn't apply to private student loans. Some private lenders have created their own internal programs that can help to make your student loan payments easier to manage. However, these programs are not required by law as with federally backed student loans.
Like federal student loans, private student loans are usually not dischargeable in bankruptcy. In this situation, wherein you are at the mercy of the private lender, a non-bankruptcy solution may be better. The best way to reduce or eliminate your private student loans might be a debt settlement. It would be rare for a debt settlement company to attempt to negotiate a settlement for a private student loan. But, there are some student loan attorneys that specialize in such settlements. You may be able to find a student loan attorney at the National Association of Consumer Advocates website.
Can Student Loans Be Discharged in Bankruptcy?
Except in rare situations, bankruptcy law states that neither federal loans nor private student loans are eligible for a bankruptcy discharge. To discharge a student loan in bankruptcy, you must file an adversarial proceeding (AP). An AP is a lawsuit filed within the bankruptcy court, after a bankruptcy case has already been filed. APs can result in full trials before the bankruptcy judge. APs are very different from normal bankruptcy proceedings.
To file an AP, you may need a bankruptcy attorney that is experienced and skilled in litigation. Many bankruptcy attorneys only want to file straightforward bankruptcies and rarely file APs. You need to be careful in choosing an attorney if you're going to try to discharge a student loan. Ask any prospective attorney if they have filed APs in the past. Even if you file an AP, you will only be successful in securing a discharge for a student loan (in most jurisdictions) if you pass the Brunner Test.
The Brunner Test
In most courts in America, you will 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. Maine, Massachusetts, New Hampshire, Rhode Island, Puerto Rico, Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Missouri, and Arkansas are the only jurisdictions wherein the Brunner Test is not the standard for determining student loan dischargeability in bankruptcy.
The test in Brunner v. New York State has three parts that help the court determine whether an undue hardship exists:
You must have extenuating circumstances that create a hardship (ie: you can't pay the student loan and still maintain a minimum standard of living), and
Those circumstances are likely to continue for a substantial portion of the repayment term of the loan, and
You have made a good faith attempt to repay the loan.
Minimal Standard of Living
Different courts across the country have different methods for determining what a "minimal standard of living" means. Many courts have adopted a position similar to the court in In re Murrell. That court indicated that debtors must minimize expenses and maximize income before the "minimal standard of living" requirement can be met. In that case, the debtor was disabled. Still, the court didn't discharge the student loan. The court held that the debtor's spouse's current income had to be considered also. The court held that the debtor's discretionary expenses were too high due to the $290.00 to $550.00 spent each month for expenses including DirectTV, internet, and phone services.
Hardship Persists for a Substantial Portion of the Repayment Period
It's difficult to predict if a bad financial situation will persist for a substantial portion of the repayment period. What constitutes "inability to pay for a substantial portion of the repayment period" will depend upon where you file for bankruptcy. If you live in New Orleans, for example, the guidance of the Fifth Circuit Court of Appeals will govern your bankruptcy. Circuit Courts hear the appeals of lower federal courts. The Fifth Circuit says "the debtor must specifically prove a total incapacity in the future to pay the debts for reasons not within the debtor's control." This is a very strict rule.
If you live in Los Angeles your case will be decided based on the guidance of the Ninth Circuit Court of Appeals. The Ninth Circuit says "the additional circumstances showing inability to pay for a substantial portion of the repayment term need not be 'exceptional,' except in the sense that they are tenacious and demonstrate insurmountable barriers to the debtor's financial recovery and ability to pay for a significant portion of the repayment period." The Court goes on to say that this allows the courts much more flexibility to consider each matter on a case by case basis.
Both of these courts apply the Brunner Test to interpret the same provision of the same Bankruptcy Code. Still, you will have a much easier task convincing a court in Los Angeles than you will a court in New Orleans that you are unable to repay a substantial portion during the repayment period. The Ninth Circuit is also helpful in that it lists some circumstances it will consider when evaluating this part of the test. It can be helpful to consider these examples, as other courts may interpret this part of the test in similar ways.
Some factors a court in the Ninth Circuit may consider include, but are not limited to:
Serious mental or physical disability of the debtor or the debtor's dependents which prevents employment or advancement;
The debtor's obligations to care for dependents;
Lack of, or severely limited education;
Poor quality of education;
Lack of usable or marketable job skills;
Maximized income potential in the chosen educational field, and no other more lucrative job skills;
A limited number of years remaining in the debtor's work life to allow payment of the loan;
Age or other factors that prevent retraining or relocation as a means for payment of the loan;
Lack of assets, whether or not exempt, which could be used to pay the loan;
Potentially increasing expenses that outweigh any potential appreciation in the value of the debtor's assets and/or likely increases in the debtor's income;
Lack of better financial options elsewhere.
Good Faith Effort to Repay the Student Loan
As with the other prongs of the Brunner Test, there is wide variability in determining what constitutes a good faith effort to repay an educational loan. In the case of Wright v. RBS Citizens Bank, an Alabama bankruptcy court held that the debtor's failure to make any payments on the student loan at a time when she had been able to make monthly payments showed that the debtor hadn't made a "good faith effort to repay the debt." The Ninth Circuit has a similar view but elaborates that while failure to make any payments is strong evidence of not meeting the good faith part of the test, there may be cases where good faith could still exist although no payments have been made. The Court also notes that good faith is primarily measured by the debtor's efforts to obtain employment, maximize income, and minimize expenses. The court also notes that an attempt to negotiate a repayment plan is an important indicator of good faith.
Remember, an adversary proceeding is required to get a student loan discharged as part of a Chapter 7 bankruptcy in the bankruptcy court. This is a complex process that you shouldn’t pursue without the assistance of a bankruptcy attorney.
Recent Developments Suggest Bankruptcy Courts Are Evolving on Student Loan Bankruptcy
There are reasons to be optimistic about recent developments in the bankruptcy court system as well as recent legislative proposals. In 2019, Senator Warren and Congressman Clyburn introduced the Student Loan Debt Relief Act. If this legislation were ever to become law, it would provide debt relief for 95% of student loan borrowers. The Act would eliminate the entire debt for 75% of student loan borrowers.
Rosenberg v. N.Y. State Higher Education Services Corp. is a case from the Southern District of New York. This is a student loan bankruptcy where an attorney filed and was able to get his educational loans discharged. Judge Morris explicitly stated in her written opinion that "she would not participate in perpetuating the myth that student loans are impossible to discharge in bankruptcy." She said that most bankruptcy attorneys believe this myth. Discharging a student loan under either the Brunner Test or the Totality of Circumstances Test used by the other states, has been near impossible up until the past couple of years, however that reality seems to be shifting.
Two of the most important student loan bankruptcy successes in the last couple of years have involved attorneys who personally filed for bankruptcy. These debtors knew the law and they were highly motivated to get their debt discharged. In the Rosenberg case, Mr. Rosenberg represented himself. In Nitcher v. Educ. Credit Mgmt. Corp, it appears the debtor did hire another attorney for additional assistance, but you can bet that the debtor would have pushed the issue. Both of these bankruptcy filers were lawyers who had approximately $200,000.00 on the line.
The Brunner Test is a very high bar to pass. The most common way of passing the Brunner Test is to be permanently disabled. Under current law, it's very difficult to discharge a student loan in bankruptcy anywhere in America. This may soon change though.
The progress in the courts is more promising than the legislative efforts. In the Nitcher case, an attorney who graduated from law school in 2008 was granted a partial discharge. She was found to pass 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. When she filed for bankruptcy, her student loans had a total balance of $198,681.00. The judge granted her a partial discharge so that her student loan was reduced to $16,500.00.
The graph below is from the Federal Reserve Economic Database (FRED). It shows how total student loan debt is now more than total credit card debt in our country.
As you can see from the graph above, student loan debt has gotten out of control in this country. Something has to be done about this situation. Everyone should be contacting their local member of Congress to push for our government to do something about this issue. Also, when you vote this fall, remember to support candidates that pledge to provide student loan debt relief.
Outside of bankruptcy, private student loans are more difficult to manage than federal student loans. The U.S. Department of Education provides opportunities for forbearances and deferments with loans in the federal loan program. These opportunities are rarely provided by private lenders. Federal student loans also offer opportunities for loan forgiveness (under certain circumstances) and income-based repayment plans.
Private lenders do not offer these relief provisions. It's important to choose a very good attorney that does a lot of bankruptcy litigation if you hope to discharge your student loans in bankruptcy. Many bankruptcy attorneys just want to file bankruptcies and leave the litigation to others. If you want to discharge student loans, you should seriously consider hiring an attorney with litigation experience in the bankruptcy courts. Upsolve helps people file their own Chapter 7 bankruptcy cases.
- (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
- (n.d.). In re Gerhardt, 348 F.3d 89 (5th Cir. 2003). Retrieved from https://scholar.google.com/scholar_case?case=13285389142966931330&q=348+F.3d+89&hl=en&as_sdt=806
- (n.d.). Educational Credit Management Corporation v. Nys (In re Nys), 446 F.3d 938 (9th Cir. 2006). Retrieved from https://scholar.google.com/scholar_case?case=17389749802138535022&q=446+F.3d+938&hl=en&as_sdt=806
- (n.d.). Wright v. RBS Citizens Bank (In re Wright), Bankr. N.D. Alabama (04/02/2014). Retrieved from https://www.govinfo.gov/content/pkg/USCOURTS-alnb-2_13-ap-00025/pdf/USCOURTS-alnb-2_13-ap-00025-0.pdf
- (n.d.). Roth v. Educational Credit Management Corporation (In re Roth), 490 B.R. 908 (9th Cir. BAP 2013). Retrieved from https://scholar.google.com/scholar_case?case=3673884293796182801&q=490+B.R.+908&hl=en&as_sdt=806
- (n.d.). Rosenberg v. New York State Higher Education Services Corp., Bankr. S.D. New York (01/07/2020). Retrieved from http://www.nysb.uscourts.gov/sites/default/files/opinions/284416_64_opinion.pdf
- (n.d.). Nitcher v. ECMC (In re Nitcher), Bankr. D. Oregon (08/23/2019, unpublished). Retrieved August 26, 2020, from https://www.orb.uscourts.gov/sites/orb/files/documents/opinions/18-3090-pcm.pdf
- Federal Reserve Bank of St. Louis. (n.d.). Total Revolving Credit Owned and Securitized, Outstanding. Retrieved August 26, 2020, from https://fred.stlouisfed.org/graph/?graph_id=767448/