Can educational loans, such as the Federal Stafford, Federal PLUS, and private loans, be discharged through bankruptcy?

Section 523(a)(8) of the US Bankruptcy Code, at 11 U.S.C., excepts from discharge debts "for 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 for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents".

For the purpose of this paragraph, the definition of of a qualifying education loan includes loans made solely to pay the higher education expenses of an eligible student, where the student is either the debtor, the spouse of the debtor, or the dependent of the debtor. In addition, the loans must be for study at a school that is eligible to participate in Title IV programs and where the student is enrolled at least half time. Loans that don't meet this definition, such as credit card debt, are still dischargeable even if they were used to pay for higher education expenses.

Thus FFELP and FDSLP loans, and education loans funded by private NONPROFIT organizations, are automatically nondischargeable in a bankruptcy proceeding. The only cases in which they can be discharged through bankruptcy are:

and then it is up to the judge to decide whether the loan can actually be discharged. (The Higher Education Amendments of 1998 repealed the provision that allowed for the discharge of education loans that had been in repayment for 7 years. This affects all bankruptcy proceedings initiated after October 7, 1998, regardless of whether they involve loans incurred before that date.)

Most court cases cite Brunner v. New York State Higher Education Services Corp. (October 14, 1987, #41, Docket 87-5013) for a definition of "undue hardship". That decision adopted the following three-part standard for undue hardship:

The second element of the standard requires the debtor to provide evidence of additional exceptional circumstances that are strongly suggestive of a continuing inability to repay, such as being disabled. The court also cited the debtor's failure to take advantage of forbearances and deferments.

If the loan program is truly private, with no involvement of government or nonprofit organizations, the loan would not come under the non-discharge provision for student loans under the Bankruptcy Code. However, the debtor's petition would still be reviewed and could be denied on various other grounds, such as abuse of the bankruptcy laws. Interestingly enough, most private student loan programs seem to have some sort of nonprofit involvement.

Section 685.212 describes the conditions for discharge of a loan obligation under the federal direct loan program, and includes the following statement on bankruptcy:

(c) Bankruptcy. If a borrower's obligation to repay a loan is discharged in bankruptcy, the Secretary does not require the borrower or any endorser to make any further payments on the loan.

Page 2-32 of the Federal Student Financial Aid Handbook states:

A student with an SFA loan discharged in bankruptcy is eligible for SFA grants, work-study, and loans. Prior to October 22, 1994, a student whose defaulted loan was discharged in bankruptcy could not receive loan funds unless the student reaffirmed the discharged debt and made satisfactory repayment arrangements. Because of legislative changes made by the Bankruptcy Reform Act of 1994, the reaffirmation requirement was lifted. Students no longer must reaffirm discharged loans before receiving new loans. In addition, if a student has a loan stayed in bankruptcy, he or she remains eligible for SFA funds as long as he or she has no loans in default (including the stayed loan) and as long as all other eligibility requirements are met.

Regardless of whether the education loan is dischargeable, the debtor should consider objecting to the claim of the holder of the loan in a Chapter 13 proceeding. This requires the creditor to provide an accounting of the amount owed and any additional charges and fees that were applied to the loan balance. Often lender records are in a state of disarray (especially if the loan has been sold) and it will be unclear how much is actually owed. The burden of proof is on the lender, not the debtor (although it is helpful if the debtor has cancelled checks and other records of payments made). The judge will then decide the amount that is properly owed.