Bankruptcy laws concerning private student loans are not static and can be influenced by both court rulings and legislative efforts. Recent developments in both these areas indicate shifts in the landscape that could make it easier for borrowers to discharge their student loans.
Recent court rulings have set a precedent for the possibility of discharging private student loans without having to prove undue hardship under specific circumstances:
The loan was not backed by a nonprofit: If no nonprofit organization supported the loan, it might be eligible for discharge.
The loan exceeded your cost of attendance: If the loan amount surpassed your school’s official education expenses, it could be discharged because it’s not a qualified education loan.
The loan was not a conditional grant of money: Loans that were not conditional grants, such as ROTC scholarships, may be discharged.
For example, a New York-based federal appeals court in July 2021 refused to dismiss a lawsuit against Navient, ruling that certain private student loans are not automatically protected from discharge in bankruptcy. And in August 2020, the 10th Circuit federal appeals court, based in Denver, Colorado, eliminated $200,000 in private student loan debt for a Colorado couple with 11 private student loan accounts.
Several pieces of proposed legislation proposed by members of Congress could make it easier to discharge student loans in bankruptcy:
The Fresh Start Through Bankruptcy Act of 2021 would allow borrowers to discharge private and federal loans ten years after the first payment becomes due, regardless of the borrowers’ personal financial situations.
The Private Student Loan Bankruptcy Fairness Act of 2019, re-introduced in August 2021, seeks to make student loans issued by private lenders automatically dischargeable in bankruptcy, eliminating the need to file an adversary proceeding.
The Medical Bankruptcy Fairness Act of 2021 would enable “medically distressed debtors” to wipe out their student loans without having to meet the undue hardship standard or pass the Brunner Test.
Though none of these pieces of legislation have passed as of yet, they indicate ongoing efforts to change the rules around student loan discharge in bankruptcy.
The implications of these court decisions and potential legislative changes could make it easier for borrowers to discharge private student loans in bankruptcy. But until such changes are firmly established, borrowers may need to explore other alternatives for managing their student loan debt