Discharging Private Student Loans in Bankruptcy: The Two-Path Framework

Private student loans can be discharged in bankruptcy, but the path depends on how the loan is classified under the Internal Revenue Code. For the full overview of whether you can file bankruptcy on student loans — covering both federal and private pathways — start with the complete guide.

Key distinction: Private student loans follow different discharge rules than federal loans. The critical question is whether your private loan qualifies as a “qualified education loan” under the Internal Revenue Code. If it does not, discharge works like any other consumer debt. If it does, you must prove undue hardship.

Federal student loans go through the Department of Justice attestation process, where the government evaluates whether repayment would impose undue hardship. Private student loans bypass that process entirely. No government agency reviews the borrower’s circumstances or recommends action to the court.

The threshold question for private loans: does the loan meet the definition of a “qualified education loan” under Section 221(d)(1) of the Internal Revenue Code? The answer places the loan on one of two paths. Loans that do not meet the definition discharge through the standard bankruptcy process as ordinary consumer debt. Loans that meet the definition receive the same protection as federal loans, requiring the borrower to prove undue hardship through an adversary proceeding.

This classification — not the lender’s identity or the loan’s marketing label — controls whether discharge requires litigation.

Section 523(a)(8)(B) makes nondischargeable “any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code.” That definition — originally designed to determine which loans qualify for the student loan interest tax deduction — now controls bankruptcy dischargeability for private loans.

A private loan qualifies only if it satisfies all of the following elements:

The loan funded qualified higher education expenses. The funds must have paid for expenses within the Higher Education Act’s “cost of attendance” definition: tuition, fees, room and board, books, supplies, and a computer. The portion of a loan exceeding the institution’s cost of attendance minus other financial aid received does not qualify as a qualified education loan.

The institution was an eligible educational institution. The school must participate in Title IV federal financial aid programs — meaning it holds a program participation agreement with the Department of Education and appears on the Federal School Code List.

The expenses were incurred during a qualifying enrollment period. The borrower must have been an eligible student when the expenses were paid or incurred. Expenses must fall within a reasonable time before or after the loan was taken out for attendance at a qualifying institution.

The loan came from an eligible lender. The statute excludes loans from persons related to the taxpayer, loans under qualified employer plans, and loans under certain annuity or insurance contracts. Outside these exclusions, any financial institution — bank, credit union, fintech company — can originate a qualified education loan.

The burden falls on the creditor to establish its loan meets this definition. If the creditor cannot prove each element, the standard discharge order covers the loan.

Private loans that fail any element of the qualified education loan test fall outside section 523(a)(8). They discharge like credit card debt, medical bills, or personal loans — through the standard Chapter 7 or Chapter 13 discharge order, with no adversary proceeding required.

Loans exceeding cost of attendance. When a private lender disbursed more than the school’s cost of attendance minus other financial aid, the excess portion does not qualify. Some lenders historically certified loans up to a set dollar amount rather than the precise cost of attendance, creating amounts that exceed what the IRC definition covers.

Loans for non-Title IV institutions. Private loans used to attend schools that do not participate in Title IV programs — including certain trade schools, unaccredited programs, and some foreign institutions — cannot meet the “eligible educational institution” requirement.

Loans for non-qualifying expenses. A private loan taken out to pay for a bar review course offered by a commercial entity, or for expenses incurred after the borrower was no longer an eligible student, falls outside the definition.

Certain refinanced loans. Refinancing a private student loan does not automatically break the connection to the original qualified education expenses. Courts have generally found that consolidated or refinanced loans retain nondischargeability. One narrow exception: when a refinancing commingles qualified and non-qualified debt into a single obligation, the new loan may not independently satisfy the IRC definition. This scenario is uncommon, and case law on it is limited.

Loans that are not technically “loans.” Tuition payment agreements, promissory notes without a transfer of funds, and other arrangements lacking the formal characteristics of a loan may not fall within section 523(a)(8). Courts require evidence of an actual loan — a transfer of funds with formal repayment terms.

For borrowers holding these types of private loans, filing bankruptcy can eliminate the debt without litigation beyond the petition itself.

Private loans that meet the qualified education loan definition carry the same discharge protection as federal loans. The borrower must file an adversary proceeding and demonstrate repaying the loan would impose an undue hardship.

Courts apply varying tests to evaluate undue hardship. The most widely used is the Brunner test, though some jurisdictions have adopted the “totality of the circumstances” approach. The specific test and how strictly courts apply it varies by circuit.

The undue hardship analysis for qualified private loans is functionally identical to the analysis for federal loans. Courts examine the borrower’s current financial circumstances, future earning capacity, and good faith repayment efforts. The same evidentiary standards apply regardless of whether the protected loan is federal or private.

One practical difference: private lenders lack the Department of Justice’s litigation resources. This affects how aggressively they pursue contested adversary proceedings, often pushing resolution toward settlement rather than trial.

Private lenders defend adversary proceedings with varying levels of resources, ranging from active litigation through discovery to complete non-response.

Lenders that actively defend discharge claims. Sallie Mae Bank (now operating distinct from Navient) has established litigation patterns for defending its private loan portfolio. Sallie Mae files answers, engages in discovery, and proposes settlement agreements with broad release language covering future bankruptcy filings. Their settlement templates require careful review to preserve the borrower’s rights.

Lenders that hold or service purchased portfolios. ZuntaFi and similar entities that hold or service purchased private loan portfolios may respond differently than the original lender. Portfolio holders sometimes lack complete loan origination records — which can undermine their ability to prove the loan meets the qualified education loan definition.

Lenders that default or do not respond. Some private lenders — particularly smaller institutions or those that have exited the student loan market — fail to respond to adversary complaints within the required timeframe. The borrower can then seek a default judgment, which courts routinely grant when the lender’s failure to respond means it cannot carry its burden to prove the loan meets the qualified education loan definition.

The CFPB’s role. In 2023, the Consumer Financial Protection Bureau published a bulletin addressing private student loan servicers collecting on loans covered by bankruptcy discharge orders. The CFPB found servicers were not maintaining procedures for distinguishing between qualified and non-qualified private loans, and were reinstating collection on all private loans after bankruptcy regardless of classification. This creates potential claims against servicers collecting on discharged non-qualified loans.

Private lenders rarely negotiate student loan settlements outside of bankruptcy; the adversary proceeding creates the leverage that makes settlement possible.

When settlement becomes available. The adversary proceeding complaint signals the borrower is prepared to litigate. Most settlement discussions begin after the complaint is served and the lender has assessed litigation costs against the loan balance.

What private loan settlements look like. Settlements can take several forms: a lump-sum payment for a fraction of the balance with the remainder discharged, a reduced principal with modified repayment terms, or an agreement to treat the loan as discharged in exchange for a payment from estate assets.

Factors affecting settlement leverage. The strength of the borrower’s classification argument matters. When the loan arguably fails the qualified education loan test, the lender faces the risk of losing entirely — discharge without any recovery. This creates stronger leverage than cases where qualification is clear and the dispute is purely about undue hardship. Loan balance, the borrower’s assets, and the lender’s litigation budget all influence the calculus.

Preserving rights in settlement agreements. Private lender settlement agreements — particularly from Sallie Mae — may contain broad release language waiving the borrower’s right to seek discharge of the same debt in a future bankruptcy filing. These provisions require careful negotiation to ensure future dischargeability rights are not forfeited if the settlement fails.

Discharging a private student loan that qualifies under section 523(a)(8)(B) requires filing an adversary proceeding — a separate lawsuit within the bankruptcy case. The discharge does not happen automatically through the bankruptcy petition.

For private loans, the adversary complaint should address both classification and undue hardship. When the borrower contends the loan does not meet the qualified education loan definition, the complaint should allege the specific failing element: the loan exceeded cost of attendance, the institution lacked Title IV eligibility, or the expenses fell outside the qualifying period. If the court agrees on classification, the loan discharges without reaching hardship. If the court finds the loan qualifies, the alternative hardship allegations provide the fallback path.

This dual-track pleading strategy — challenging classification first, arguing hardship second — gives the borrower two independent paths to discharge in a single proceeding.