How Hard Should it be to Discharge a Student Loan in Bankruptcy?
Legal Sidebari
How Hard Should it be to Discharge a Student
Loan in Bankruptcy?
August 27, 2018
In recent years, many Americans have found themselves increasingly unable to repay their student loans.
Ordinarily, a debtor who cannot afford to pay his debts may potentially “discharge”—that is, obtain relief
from—many of those debts by filing for bankruptcy. The federal Bankruptcy Code, however, limits the
circumstances in which a debtor may discharge a student loan through the bankruptcy process. As
explained in greater detail below, a debtor may generally not discharge a student loan in bankruptcy
unless he can prove that repaying the debt would impose an “undue hardship” on the debtor and his
dependents—a term that many courts have interpreted to permit a discharge of student loans in narrow
circumstances only.
Several Members of the 115th Congress have introduced a variety of bills in response to criticisms that
existing bankruptcy law makes it too difficult for debtors to obtain relief from their student loans. This
Sidebar accordingly analyzes the treatment of student loans under existing bankruptcy law before
surveying a selection of bills that, if enacted, would alter the legal standards governing whether and when
a debtor may discharge student loan debts. A separate CRS product discusses the treatment of student
loans in bankruptcy in greater depth.
Bankruptcy and Student Loans
The federal Bankruptcy Code attempts to balance several competing policy concerns. On the one hand,
the bankruptcy system aims to give honest debtors a “fresh start”—that is, to grant debtors relief from
debts they cannot repay. This fresh start generally comes in the form of a “discharge” of many of the
debtor’s debts, which generally consists of a legal right not to pay the discharged debts as well as
safeguards against future harassment by the creditor whose debt is discharged. In exchange for receiving
this discharge, a consumer debtor must generally distribute a portion of his assets or income to his
creditors to the extent the debtor has the financial ability to satisfy their claims in whole or in part.
Beyond merely seeking to provide relief to debtors, bankruptcy law also seeks to promote countervailing
interests, such as maximizing total creditor return. One of several ways that the Bankruptcy Code
attempts to balance these competing interests is by making certain types of debts presumptively or
categorically nondischargeable. “Congress has decided” that, in some circumstances, “public policy
considerations override the need to provide the debtor with a fresh start.” As relevant here, and as
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explained in significantly greater detail in a separate CRS product, Section 523(a)(8) of the Bankruptcy
Code sharply limits the circumstances in which a debtor may discharge a student loan through the
bankruptcy process. With extremely limited and technical exceptions, a debtor may not discharge a
student loan unless he proves that excepting the loan from discharge “would impose an undue hardship on
the debtor and the debtor’s dependents.”
Several Members of the Congress that first enacted Section 523(a)(8) offered multiple policy
justifications for treating student loans differently from other types of consumer debt—many of which are
typically freely dischargeable in bankruptcy. First, Section 523(a)(8)’s sponsors sought to preserve the
financial vitality of the student loan program so that funds remained available for future students to
finance their educations. Secondly, student loans have significantly different characteristics than certain
other common forms of consumer debt, like home mortgages and car loans. Whereas a debt collector may
repossess and resell a house at auction if a homeowner fails to pay his mortgage, there is no comparable
way to repossess someone’s education. Supporters of Section 523(a)(8) therefore concluded that this
distinction from other forms of consumer debt supported treating student loans less favorably in
bankruptcy. Finally, Section 523(a)(8)’s sponsors sought to address the concern that students would abuse
the student loan program. If student loans were freely dischargeable in bankruptcy, students might
strategically avoid paying their student loans by declaring bankruptcy immediately after graduation, when
they have the highest debt load and the fewest assets to distribute to creditors. Such students could then
reap all the economic and intellectual benefits of a postsecondary degree while “making the taxpayers
pick up the tab.”
Significantly, while Section 523(a)(8) prohibits debtors from discharging student loans unless they can
prove an “undue hardship,” Section 523(a)(8) does not expressly define what an “undue hardship” is. Nor
has the Supreme Court articulated a controlling interpretation of that statutory phrase. As a result,
different federal courts have interpreted the “undue hardship” standard differently. Most (but not all)
require the debtor to prove that:
1. He could not maintain a “minimal” standard of living for himself and his dependents if he
were forced to repay his student loans;
2. His inability to repay the loans is likely to persist into the future; and
3. He has made good faith efforts to repay the loans.
The relatively open-ended and “fact intensive” nature of this legal standard has resulted in numerous
doctrinal splits between the federal courts regarding when a debtor is entitled to an undue hardship
discharge. Some critics of the undue hardship standard, citing what they characterize as “the haphazard
fashion in which courts have determined whether a debtor’s circumstances support a claim of undue
hardship that warrants forgiveness of educational debt,” have contended that “the vagueness of section
523(a)(8) fosters litigation and inconsistency of results.” Apart from criticisms concerning whether
Section 523(a)(8)’s text provides courts with sufficient interpretive guidance for determining whether any
given debtor may validly discharge a student loan, some have also claimed that the undue hardship
standard makes it too difficult for debtors to obtain relief from their educational debts.
Legislative Proposals Pending in the 115th Congress
Responding to criticisms regarding the current treatment of student loans in bankruptcy, Members of the
115th Congress have introduced several bills that propose to amend Section 523(a)(8) in a variety of
ways. To name just a few examples, several bills propose to make student loans freely dischargeable in
bankruptcy like most other consumer debts, without requiring the debtor to prove an undue hardship.
Other bills would make privately issued student loans freely dischargeable, but leave the treatment of
federal student loans unchanged.
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As explained below, however, one of the newer bills pending in the 115th Congress takes a slightly
different tack. Notably, the Bankruptcy Code has not always required debtors to demonstrate an undue
hardship as a prerequisite for discharging a student loan. As originally enacted, Section 523(a)(8) gave
debtors two different options for discharging a student loan: the debtor could either (1) satisfy the undue
hardship standard; or (2) wait to file bankruptcy until five years after the student loan first became due.
Thus, from 1978 until 1990, student loans that first became due over five years before the debtor filed for
bankruptcy were freely dischargeable through the bankruptcy process, no matter whether repaying those
loans would amount to an undue hardship. Commentators referred to this latter option for discharging a
student loan as the “time lapse discharge” or “temporal discharge” option. In 1990, however, Congress
narrowed the scope of the time lapse discharge option by increasing the five-year period to seven years.
Congress then eliminated the time lapse discharge option entirely when it enacted the Higher Education
Amendments of 1998 (HEA). The legislative history of the Amendments reflects that Congress opted to
eliminate the time lapse discharge in order “to ensure the budget neutrality of” the HEA. Thus, under
current law, proving an undue hardship is effectively the only way that a debtor may discharge a student
loan through the bankruptcy process.
Several commentators have advocated amending the Bankruptcy Code to revive the time lapse discharge
option—that is, to allow debtors to freely discharge student loans that first became due several years
before the debtor filed for bankruptcy without demonstrating an undue hardship. Supporters of the time
lapse discharge option emphasize that Congress initially enacted Section 523(a)(8) to prevent debtors
from abusing the student loan program by filing for bankruptcy immediately after graduation. A debtor
who waits several years before filing for bankruptcy, however, is arguably less likely to be abusing the
student loan program. Supporters also argue that a debtor who waits several years before seeking to
discharge his student loans is likely to have greater income or assets than a recent graduate who has just
entered the workforce, which could be used to partially satisfy the debtor’s outstanding student loan debt
before discharging the remainder that the debtor is unable to repay.
The Student Loan Bankruptcy Act of 2018 (H.R. 6588) (SLBA) was introduced in the House of
Representatives on July 26, 2018 in response to calls to reinstate the time-lapse discharge option. If
enacted, the SLBA would allow debtors to discharge a student loan in bankruptcy—without proving an
undue hardship—if the loan “first became due more than 5 years . . . before the date” the debtor filed for
bankruptcy. The SLBA would thereby make it easier for debtors to discharge federal and private student
loans alike. Moreover, by narrowing the universe of cases in which a court must decide whether the
debtor has adequately demonstrated an “undue hardship,” the SLBA could potentially mitigate the
aforementioned doctrinal confusion regarding how courts should interpret that undefined phrase. On the
other side of the ledger, however, the SLBA could adversely affect the financial interests of student loan
creditors—which include the federal government—by prohibiting those creditors from collecting debts
they might otherwise be able to recover. Notably, the SLBA would be prospective in effect only—the
SLBA states that it “shall not apply with respect to any debt for an educational benefit, overpayment,
loan, scholarship, or stipend received by a debtor before the effective date of th[e] Act,” and shall not take
effect until “1 year after the date of . . . enactment.” Potential justifications for restricting retroactive
application of the SLBA could include reducing the act’s impact on the federal budget and avoiding
interference with the expectations of existing creditors. As of the date of this writing, the SLBA is
presently pending before the House Committee on the Judiciary.
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Author Information
Kevin M. Lewis
Legislative Attorney
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