Student Loans and Bankruptcy

Student loans are notoriously difficult to discharge in bankruptcy – but they are not impossible to discharge, and the landscape has changed substantially since 2022. For many South Florida clients, the right answer is not direct discharge but a combination of bankruptcy relief for other debts plus federal income-driven repayment programs for the student loans.

The Statutory Standard: Undue Hardship

Section 523(a)(8) of the Bankruptcy Code excepts most educational loans from discharge unless the debtor can establish that excepting the debt from discharge would impose an "undue hardship" on the debtor and the debtor's dependents. The "undue hardship" question is decided in a separate adversary proceeding filed within the bankruptcy case.

The Brunner Test (Eleventh Circuit)

The Eleventh Circuit, which covers Florida, applies the Brunner test: the debtor must prove all three of the following by a preponderance of the evidence:

1. The debtor cannot maintain a "minimal" standard of living for the debtor and dependents based on current income and expenses if forced to repay the loans
2. Additional circumstances exist indicating this state of affairs is likely to persist for a significant portion of the repayment period
3. The debtor has made good-faith efforts to repay the loans

Historically, this was a difficult standard to meet, and discharge cases were rare. The standard remains demanding, but case law has evolved to permit partial discharges and to apply the test more flexibly than the strictest early decisions.

The 2022 DOJ Adversary-Process Guidance

In November 2022, the Department of Justice and Department of Education issued joint guidance creating a streamlined process for resolving undue-hardship adversaries against federally-held student loans. Under the guidance, debtors complete an attestation form documenting present financial circumstances, future inability to pay, and good-faith repayment efforts. DOJ attorneys are directed to recommend discharge in cases satisfying the criteria.

The new process has substantially increased the rate at which federal student loans are discharged in bankruptcy adversaries – though it remains a more demanding process than discharge of garden-variety unsecured debt.

Federal vs. Private Student Loans

Federal student loans (Direct, FFEL, Perkins) are subject to the undue-hardship test but are also eligible for federal repayment programs that often work better than bankruptcy discharge:

• Income-Driven Repayment (IDR) plans capping payments at 10-20% of discretionary income
• SAVE plan (when available)
• Public Service Loan Forgiveness (PSLF) for borrowers in qualifying public-service employment after 120 qualifying payments
• Total and Permanent Disability discharge
• Borrower Defense to Repayment discharge for certain school-misconduct cases
• Closed School discharge

Private student loans are also subject to the undue-hardship test in bankruptcy, but they lack the federal repayment-program safety net. Importantly, private loans that did not finance "qualified educational expenses" at a "Title IV eligible school" do not fall within Section 523(a)(8) at all and are dischargeable as ordinary unsecured debt – a frequently-overlooked argument that has succeeded in cases involving bar-study loans, certain career-school loans, and similar products.

How Other Bankruptcy Tools Help With Student Loans

Even when student loans themselves are not discharged, a bankruptcy case improves the financial picture in ways that make student-loan repayment manageable:

• Chapter 7 discharges other unsecured debt, freeing up cash flow for IDR or PSLF payments
• Chapter 13 includes student loans in the plan as long-term debt; the automatic stay halts collection actions for the duration of the plan; payments inside the plan count toward Public Service Loan Forgiveness in many cases
• Tax debt, medical debt, and credit card debt can be wiped out, allowing focus on the federal student-loan repayment plan

Practical Strategy for Most Clients

For most Miami clients with significant student-loan debt, our typical approach is:

1. File Chapter 7 or Chapter 13 to discharge or restructure other debt
2. Enroll the federal student loans in an Income-Driven Repayment plan, where the monthly payment may drop to $0 if income is low enough
3. Consider a Section 523(a)(8) adversary against private student loans, particularly where the "qualified educational expense" argument applies
4. For federally-held loans where the borrower is in clear, lasting financial difficulty, evaluate the DOJ attestation process for direct discharge

The Brunner Factors in Practical Detail

Each prong of the Brunner test is worth understanding individually, because every contested student-loan adversary in the Eleventh Circuit turns on which prong is in dispute.

Prong One: Minimal Standard of Living

The first prong asks whether the debtor can repay the loans and still maintain a "minimal" standard of living. Courts in the Southern District of Florida do not require destitution. The analysis compares Schedules I and J to the payment that would be required under the loan terms (often the standard 10-year repayment amount, not an IDR amount). Reasonable expenses are allowed: housing at local rental rates, food at USDA moderate-cost levels, utilities, transportation, basic medical care, modest clothing replacement, school costs for dependents, and similar items. A modest level of internet, modest entertainment, and a modest car payment are not luxuries. The question is whether the budget can absorb the loan payment without dropping below a minimal – not subsistence – level.

Prong Two: Persistence of Hardship

The second prong asks whether the financial circumstances are likely to persist for a significant portion of the repayment period. This is where many cases turn. Courts look for "additional circumstances" beyond a temporary income drop. Documented disability, chronic illness, advanced age, family responsibilities, a stagnant career in a saturated field, and a long history of failed earning despite genuine effort have all been credited. Younger debtors with marketable skills and intact health face a harder showing on this prong.

Prong Three: Good Faith

The third prong asks whether the debtor has made good-faith efforts to repay. Good-faith evidence includes any history of making payments when possible, attempts to enroll in IDR plans, communications with loan servicers, and the absence of recent unnecessary borrowing. Filing bankruptcy in itself is not bad faith. Failure to enroll in IDR when eligible, however, can weigh against good faith.

The 2022 DOJ/ED Attestation Form in Detail

The November 2022 guidance directs Department of Justice attorneys handling student-loan adversaries to evaluate the debtor's situation using a standardized attestation. The attestation collects:

• Current household income and necessary household expenses, compared to IRS local standards and HHS Poverty Guidelines
• Evidence that the debtor's future financial picture is unlikely to improve – advanced age, disability, long-term unemployment in a chosen field, or other persistent factors
• Records of past repayment attempts – payments made, forbearance and deferment history, attempts to enroll in IDR, and communications with the servicer

If the attestation shows the debtor meets the criteria, the DOJ attorney is directed to stipulate to discharge or to a partial discharge tied to a manageable payment amount. The 2022 guidance has dramatically increased favorable outcomes in federal-loan adversaries – before the guidance, discharges were rare; under the new process, qualifying debtors who file adversaries are routinely seeing relief.

Adversary Proceedings: How the Litigation Actually Works

An undue-hardship case requires a separate lawsuit filed within the bankruptcy – an adversary proceeding under Bankruptcy Rule 7001(6). The complaint is filed against the loan holder (the U.S. Department of Education for federal Direct loans; the private lender or servicer for private loans). The defendant answers. Discovery follows. For private loans without the benefit of the DOJ attestation process, the case often goes to trial. The plaintiff must prove all three Brunner prongs by a preponderance of the evidence; the court decides whether to discharge all, part, or none of the debt.

Adversaries are not free. Filing fees, discovery costs, and attorney time add up. For a debtor whose only debt is a $20,000 federal loan, the federal IDR path (with a $0 to small monthly payment and eventual forgiveness) may be the better practical choice. For a debtor with $200,000 in private loans and no IDR option, an adversary is often worth the cost.

Non-Qualified Educational Loans – Dischargeable Without an Adversary

Section 523(a)(8)(B) covers "qualified educational loans" as defined in 26 U.S.C. § 221(d)(1). Loans that do not meet this definition are not subject to the undue-hardship requirement and can be discharged like any other unsecured debt. Loans that frequently fall outside the qualified-educational-loan definition include:

• Bar-study loans – loans taken out specifically to pay for bar review courses, bar exam fees, and post-graduation living expenses while studying for the bar
• Loans for attendance at unaccredited or non-Title-IV-eligible institutions
• Loans for K-12 private school tuition
• Loans that exceeded the cost of attendance (the "amount of loan" exceeded "cost of attendance" carve-out)
• Loans for non-degree career and vocational programs not eligible for federal aid

The Eleventh Circuit's decision in McDaniel recognized the carve-out and has been followed widely. We screen every private-loan file for facts that may bring the loan outside § 523(a)(8) before considering an adversary on undue-hardship grounds.

Income-Driven Repayment as the Realistic Alternative

For most federal-loan borrowers, the right answer is not bankruptcy discharge of the loans – it is enrollment in an IDR plan that caps the monthly payment at a percentage of discretionary income. After 20 to 25 years of payments (depending on the plan), the remaining balance is forgiven. For borrowers in qualifying public-service employment, Public Service Loan Forgiveness forgives the balance after 120 qualifying monthly payments (10 years). PSLF is available to employees of government agencies and most 501(c)(3) nonprofits, including hospitals, schools, and legal-aid offices. The qualifying-payment count is portable across employers within the qualifying categories.

Combined with a Chapter 7 that discharges credit cards, medical debt, and other unsecured obligations, an IDR enrollment often produces the same monthly cash-flow outcome as a successful student-loan discharge would, without the cost and uncertainty of an adversary proceeding.

Coordinating With the Rest of Your Financial Picture

Student loans rarely exist in isolation. A debtor with $80,000 in federal student loans, $30,000 in credit cards, $15,000 in medical bills, and a wage garnishment is best served by addressing all of these together. Bankruptcy halts the garnishment under the automatic stay, discharges the credit cards and medical bills via the discharge order, and provides time and breathing room to enroll the student loans in IDR. See wage garnishment and medical debt and bankruptcy for more on the related issues.

Schedule a Consultation

To discuss the right strategy for your specific student-loan situation, call 786-522-1411 or email [email protected].