Can You File Bankruptcy on Student Loans?
Select’s editorial team works independently to review financial products and write articles that our readers will find useful. We may receive a commission when you click on product links from our affiliate partners.
When student loan payments get heavy, the idea of paying off your loans completely through bankruptcy may start to seem like the second best option. In the event of bankruptcy, you would be completely free from this big debt.
But filing for bankruptcy in any scenario is a huge financial decision – and usually a last resort effort. Bankruptcy stays on your credit report for seven to 10 years, making it destructive to your credit. It is also extremely difficult to do when it comes to eliminating your student loans.
“We’ve had clients who have tried to get bankruptcy discharge on federal student loans, but they fail the vast majority of the time,” said Travis Hornsby, founder of Student Loan Planner. “If your income is above the poverty line and you don’t have a permanent disability, your chances are slim.”
Declaring bankruptcy on your student loans is difficult
In order to declare bankruptcy on student loans, borrowers must pass a multi-part test proving that they have no chance of being able to repay the debt. They must show that paying their student loans would cause them “undue hardship.”
“Congress did not define what that meant by ‘undue hardship’, so it was left to the courts to decide,” said higher education expert Mark Kantrowitz. As such, courts use a common method called the Brunner test to assess whether or not a borrower qualifies for a student loan discharge in bankruptcy. Through the Brunner test, a borrower must prove the following:
- A current inability to repay debt while maintaining a minimum standard of living;
- A high probability that these circumstances will persist for most of the normal loan repayment period; and
- A good faith effort to repay loans using financial relief options like deferrals, forbearances, and income-based repayment
How to demonstrate “undue hardship”
“The discharge of student loans in bankruptcy is very rare, but not completely impossible,” adds Kantrowitz.
According to Kantrowitz, these are certain circumstances in which borrowers may have shown “undue hardship:”
- The borrower is disabled, but the private student loan does not provide disability release.
- The borrower has a dependent with a disability, which affects their ability to work full time while caring for the dependent, or when the cost of caring for the dependent results in a standard of living higher minimum.
- The borrower has very low income and limited prospects for increasing his income.
- Alimony and child support obligations reduce the borrower’s net income, which affects their ability to maintain a minimum standard of living while paying off student loan debt.
- The borrower has a high cost of living due to their place of residence (eg New York, Los Angeles, San Francisco, Boston), which affects the minimum standard of living threshold.
- The college degree was worthless and does not allow the borrower to earn enough to pay off the debt.
- The amount of debt is excessive in relation to the borrower’s income, making it difficult to repay the debt. For example, a grandparent co-signed a private student loan for a grandchild and is now retired on a fixed income.
Consider Other Options Before Bankruptcy
Obtaining a bankruptcy discharge on your student loans is not easy, and luckily there are other steps desperate borrowers can take before they make that last ditch effort.
“In the procedures where our clients have tried [filing for bankruptcy], if they can’t prove that they have no hope of paying off the debt, the education ministry usually responds by telling the borrower to sign up for an income-based repayment plan, ” explains Hornsby.
Federal income-based repayment plans recalculate your monthly bill based on any change in your income. Your monthly student loan payment therefore reflects how much you can afford to pay.
Hornsby suggests income-based repayment plans such as Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE). With these programs, your credit score will not be ruined like it would in a bankruptcy proceeding, and you will only have to pay 10% of your discretionary income. After the end of the repayment period, any remaining balance is forfeited.
Is your monthly student loan payment just too high?
If your monthly payment is just too high, consider refinancing your student loans. With refinancing, you can both get a lower interest rate and extend the term of your loan so that your monthly payments are lower. While this means more months, if not years, of interest collection, it can help you right away if you are strapped for cash.
SoFi Student Loan Refinancing offers variable and fixed interest rates, low interest rates, various loan terms, no application or origination fees, refinancing protections, and it also allows a co-signer. Read Select’s full review on SoFi Student Loan Refinancing.
With the federal student loan interest and payment freeze currently in place until September 30, 2021, we only recommend that private student loan borrowers refinance at this time. Keep in mind that refinancing your federal student loans, even after the freeze is over, means you lose government protections like income-based repayment plans and any type of loan forgiveness.
SoFi student loan refinancing
No origination fees to refinance
Federal, private, graduate and undergraduate loans, Parent PLUS loans, medical and dental residency loans
Types of loans
Variable rates (APR)
From 2.24%; from 2.37% for medical / dental residents (rates include a 0.25% discount on automatic payment)
Fixed rates (APR)
From 2.99%; from 3.12% for medical / dental residents (rates include a 0.25% discount on automatic payment)
From $ 5,000; over $ 10,000 for medical / dental residence loans
Minimum credit score
Authorize a co-signer
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.