Can You Discharge Federal Student Loans Through Bankruptcy?

• It has historically been difficult to discharge student loans through bankruptcy.
• Recent changes, however, made it easier and less costly.
• Borrowers whose expenses outweigh their income are more likely to qualify for relief.
• Bankruptcy can erase many different kinds of federal student loans, not just Direct Loans.

Contrary to popular belief, many federal student loan borrowers can erase some or all of their student debt through bankruptcy.

The federal government instituted a new process in late 2022 to determine whether a federal student loan borrower could have their debt erased through bankruptcy. The change lowered the bar borrowers needed to clear to qualify for full or partial relief, and it standardized the Department of Justice's (DOJ) review process for each case.

It's only been a year, but results so far have been promising for borrowers.

The DOJ said that in 99% of bankruptcy cases over the past year, the government recommended and bankruptcy courts agreed to a full or partial discharge of federal student loan debt. That may be a small number of borrowers, however, as an analysis from the advocacy group Student Defense found fewer than 45 borrowers had gotten a discharge as of August.

Scott Waterman, standing Chapter 13 trustee for the Eastern District of Pennsylvania, told BestColleges that perhaps most importantly, the DOJ's change standardized the application process so that borrowers have a clearer idea of whether they will qualify for relief even before they head to bankruptcy court.

"It's easier today to discharge a student loan through bankruptcy than any time since 2005," Waterman said.

Can Student Loans Be Forgiven Through Bankruptcy?

Yes, borrowers can have both private and federal student loans forgiven through bankruptcy.

Historically, it had been much easier to discharge private loans through bankruptcy court than it was for federal student loans, Waterman said. However, the 2022 guidance means that federal borrowers now have a clear path to loan forgiveness through bankruptcy.

Applications are still handled on a case-by-case basis.

That means there is no guarantee that a borrower's loans will be forgiven through bankruptcy. Government attorneys overseeing each application may also choose to only partially discharge a loan, rather than wiping an outstanding loan balance completely.

Additionally, all federal student loan types are eligible for discharge. The Department of Education (ED) clarified this fact in a Dear Colleague letter published in October 2023.

That includes loans from the following federal programs:

• Direct Loan Program
• Federal Family Education Loan (FFEL) Program
• Federal Perkins Loan Program

How to Qualify for Debt Forgiveness Through Bankruptcy

The Department of Justice outlined three conditions that must be satisfied in order for a borrower's federal student loan debt to be erased.

1. The debtor presently lacks an ability to repay the loan.
2. The debtor's inability to pay the loan is likely to persist in the future.
3. The debtor has acted in good faith in the past in attempting to repay the loan.

Lacks Ability to Repay

The first box a borrower needs to check involves proving that they won't be able to maintain "a minimal standard of living" while making student loan payments.

According to the DOJ's guidance, this involves compiling all of a borrower's expenses and comparing them with the borrower's gross income. The department then determines whether the borrower has enough discretionary income to afford payments on the standard 10-year student loan repayment plan.

If not, then the borrower could qualify for full or partial relief.

Waterman said prior to the 2022 guidance, proving "undue hardship" often involved an arduous discovery process and depositions. This simplified guidance allows borrowers and bankruptcy attorneys to have a clearer picture of whether federal student loans would be discharged to begin with.

It also makes the process cheaper for borrowers since they no longer have to retain a lawyer for depositions or a barrage of document requests.

Waterman also noted that the guidance provides some room for flexibility.

Simply listing a borrower's expenses at the time of filing for bankruptcy may not paint the full picture. For example, a borrower who is living with family so that they can afford basic needs may seem on paper like they can afford some of their federal student loan payments. The attestation form borrowers fill out gives them a chance to point this out as a reason to qualify for full forgiveness.

Inability to Repay Likely to Persist

Step two is meant to determine whether a borrower's hardship is likely to prevent them from repaying their loan in full in the future.

The DOJ's guidance outlines five indicators to show a borrower's inability to repay is likely to persist:

• The debtor is 65 years old or older.
• The debtor has a chronic disability or injury that may impact earning potential.
• The debtor has been unemployed for at least five of the last 10 years.
• The debtor failed to obtain the degree they pursued using their student loan.
• The loan has been in repayment for at least 10 years, not including time spent enrolled.

This isn't an exhaustive list, the guidance states. Borrowers may include other indicators of a future inability to repay that the Department of Education and the DOJ may take into consideration.

Waterman said this new guidance is a sizable shift from how the DOJ previously determined if hardship would persist.

Previously, he explained, a borrower would need to hire a vocational expert to opine on the borrower's income potential. These vocationalists were often pricey, Waterman said, and would deter borrowers from even seeking to discharge federal student loans through bankruptcy.

He added that DOJ attorneys would previously impose their own values on a borrower's life choices, which may prevent borrowers from debt relief. For example, he said attorneys previously may question why a borrower had so many children if they had sizable student loan debt, or why they didn't pursue a degree in a higher-paying field.

The DOJ's 2022 guidance removes these subjective measures.

Acted in Good Faith to Repay

Lastly, a borrower must show they made a "good faith" effort to repay their federal student loans.

The DOJ's guidance lists some examples of good faith attempts:

• Making payments
• Applying for deferment or forbearance
• Applying for an income-driven repayment (IDR) plan
• Attempting to consolidate a loan
• Responding to outreach from a loan servicer or collector

Waterman stressed that enrolling in an IDR plan is beneficial because it not only lowers monthly payments for most borrowers, but it also improves their chances of qualifying for debt relief through bankruptcy. When determining whether a borrower has the ability to repay their loans, a bankruptcy court looks only at their ability to repay through the standard 10-year repayment plan, even if they are on a more affordable IDR plan.

Essentially, the DOJ wants to see that a borrower engaged with the student loan repayment process, he added, rather than just ignoring payments altogether because the borrower couldn't afford them.

How to File Bankruptcy on Student Loans

Discharging student loans through bankruptcy involves a rigid step-by-step process.

1. Gather Student Loan Information

Waterman recommends that borrowers and their bankruptcy attorneys first gather any information they can about their federal student loans.

Borrowers can find the information they may need using their Federal Student Aid (FSA) ID.

Future steps in the process will ask borrowers to list information like when they started repaying their loans, how much of their loans they have paid off, and periods in which they were in deferment or forbearance.

2. File an Adversary Proceeding

An adversary proceeding (AP) is a lawsuit filed separate from, but related to, a bankruptcy case.

In the case of federal student loans, it involves a borrower filing a suit against the federal government. Typically, filing an AP is the first step in reaching a settlement with ED and the DOJ, or it can result in a government attorney refusing a settlement agreement if the guidance outlined above isn't met.

3. Submit an Attestation Form

Introducing the 15-page attestation form is perhaps the most significant change instituted in November 2022.

Waterman explained that the form, available to review through the DOJ, asks for nearly all the information ED and the government attorney overseeing the case will need to reach a settlement. It allows borrowers to prove they meet the criteria outlined above.

The information the attestation form asks for includes:

• Income data
• Current monthly loan payment amounts
• Past payment history
• Virtually all living expenses
• Employment history
• Age
• Any attempts to apply for forbearance or deferment
• Current assets, including real estate and motor vehicles owned

Waterman said assets are considered in the settlement decision but should not prevent the government from discharging a loan if those assets are difficult to liquidate or essential to the debtor.

4. Review Account History, Loan Details

ED will then provide the borrower and the government attorney with all available loan details to help the attorney reach a decision.

5. Receive, Review Settlement Proposal

Once the attorney has all the necessary information — which may involve asking the borrower to submit additional documentation — they submit a recommendation for a settlement. ED will also make a recommendation.

The local U.S. Attorney's office must issue a final approval.

The borrower and their bankruptcy lawyer may review the settlement and agree or turn down the terms. The original bankruptcy case cannot close, however, with any pending APs.

6. File Consent Judgment With Bankruptcy Court

Once all parties agree to the settlement, they can file a consent judgment with the bankruptcy court overseeing the borrower's bankruptcy.

Could the Easier Loan Discharge Process Go Away?

It's unlikely that the 2022 guidelines will go away anytime soon, Waterman said.

The federal government began to formulate this new settlement process under former President Donald Trump's administration, he said. President Joe Biden's administration implemented the guidance, which shows some level of bipartisan agreement that it is worthwhile to help struggling borrowers.

Waterman clarified that the DOJ guidance does not create a new right for a private citizen to sue the government.

Instead, the guidance simply codifies a new interpretation of existing law. It creates a more objective, rather than subjective, system for deciding whether a borrower's federal student loans should be erased through bankruptcy.