Federal student loans became nondischargeable in bankruptcy in 1976. Before then, both federal and private student loans could be discharged along with credit card debt and other consumer debt.
That ended when Congress passed the Higher Education Act of 1965. In Section 439(A) of the Act, Congress made student loans nondischargeable in bankruptcy unless:
- More than 5 years have passed since you entered repayment or
- Not discharging the loans would cause you and your dependents an undue hardship.
Two years later, Congress passed the Bankruptcy Code. In Section 523(a)(8) of the Code, Congress:
- added the student loan nondischargeability exemption from the Act; and
- specified the type of loans the section applied: loans made by the government or nonprofit institution of higher education.
From then until now, Congress tweaked the language to include different types of student debt.
As it stands now, 4 types of student loan debt are exempt from discharge in chapter 7 bankruptcy and chapter 13 bankruptcy:
- A student loan made, guaranteed, or insured by the government;
- A student loan made under a loan program funded by the government;
- A student loan made under a loan program funded by a nonprofit; and
- A student loan made to a student that did not exceed his cost of attendance.
In all those changes, Congress never bothered to define undue hardship.
As a result, bankruptcy judges have had to develop their own undue hardship tests like the Brunner test and the totality of the circumstances to test to determine whether a debtor was entitled to a student loan discharge.
Let’s talk about how we got here.
Since it first made student loan debt nondischargeable in bankruptcy, Congress has changed the law 5 times:
- The Act on August 14, 1979
- Bankruptcy Amendments and Federal Judgeship Act of 1984
- Crime Control Act of 1990
- Higher Education Amendments of 1998
- Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
Let’s talk about each amendment in turn.
The 1979 Act
The 1979 Act did two things. First, it made it so a student loan made by the government or made under a program funded by the government or a nonprofit institution was nondischargeable. This change was to make sure that a loan made under the federal Perkins Loan program received discharge protection.
A Perkins loan is a federal student loan made by a school to a student. The funds for the loan program come from a pool contributed to by both the government and the school.
Before the 1979 Act, it was arguable that a bankruptcy court could decide the section didn't apply to a loan made under the Perkins loan program. This change to the Act closed that loophole.
Second, the Act also changed the Bankruptcy Code by extending the 5-year period in cases where the student loan borrower took a deferment or forbearance.
This change made it more difficult to tell when 5 years had passed. No longer could you look at when the last loan entered repayment and add 5 years.
You had to pull the actual payment history for the student debt to see if there were any deferments or forbearances.
The Bankruptcy Amendments of 1984
The 1984 Amendment removed the phrase “of higher education” from “nonprofit institution”. This change was made to include federal loans made by nonprofit institution centers that arguably weren’t focused on higher education: seminaries, barbering colleges, etc.
The Crime Control Act of 1990
The Crime Act changed the Bankruptcy Code in two ways.
First, it made conditional grants of money for education nondischargeable. Before this change, it was arguable that a ROTC scholarship recipient who didn’t fulfill his obligation, could file bankruptcy and not have to pay his scholarship back. Following this change, a former ROTC cadet would have to prove undue hardship or wait until the repayment period lapsed before he could discharge his student loans.
Second, the Crime Act increased the waiting period from 5 years to 7 years.
The Higher Education Amendments of 1998
With this change, Congress changed the way the section physically looked. Before, the section was broke into two paragraphs, (A) and (B). After, there was just one.
Why this change was made, I don’t know. It saved space I guess.
The change didn’t last long. Seven years later, Congress made it’s last change to the section.
In passing BAPCPA, Congress broke section 523(a)(8) into two main three parts: (A)(i), (A)(ii), and (B).
It’s been said that in breaking the section into three parts, Congress was attempting to clarify that the three subsections applied to different types of education debts.
For my money, the stylistic change matters less than what Congress added to the section.
In (B), Congress made it so a private loan was excepted from discharge so long as it met the Internal Revenue Code's requirements to be a “qualified education loan.”
Before this change, private student loans arguably weren't protected from bankruptcy discharge. As I’ve shared above, Congress changed the bankruptcy law to protect federal student debt from discharge.
BAPCPA changed that — at least for private student loans that are qualified education loans.
The exact requirements for a loan to be a qualified education loan are many. We won’t go through them all here.
Instead, let's focus on just two of the requirements:
- The loan must be made to pay qualified higher education expenses at a school participating in the federal student aid program and
- The loan must not have exceeded the borrower’s cost of attendance.
Before I file an adversary proceeding for a private loan, I check both of these requirements. I've found them to be the easiest way to determine if my client's private student loan debt should be excepted from discharge or whether I have to argue undue hardship.