February 15, 2022

All is Not Lost: Reforming the Treatment of Student Loans in Bankruptcy

Nancy Conneely, Managing Director of Policy
Policy and Advocacy


It is commonly believed that student loans cannot be discharged in bankruptcy. That’s not true. They are dischargeable, it’s just so difficult to do so that few borrowers ever try. The current way that student loans are treated in bankruptcy is at odds with the promise of a “fresh start” and should be reconsidered by Congress and the U.S. Department of Education (ED).

Prior to 1976, student loans, much like other forms of unsecured credit, were dischargeable in bankruptcy; but changes made over the last 45 years to the Bankruptcy Code have resulted in overly burdensome hurdles to discharge, such as proving that the debt causes an “undue hardship.” A lot has changed in that time — more jobs require a postsecondary degree, student debt has increased, and wages have stagnated, to name a few — but bankruptcy law does not reflect these new realities. What’s more, over the last two years, the COVID-19 pandemic has only heightened the financial struggles of many Americans, millions of whom will restart payments on their student loans in the coming months, which is something they may not be financially prepared to do.

AccessLex Institute has long advocated for responsible borrowing, offered quality counseling and other relevant and timely information to student borrowers, and encouraged diligent repayment by borrowers. However, we recognize that the fresh start afforded through bankruptcy may be the most appropriate choice for borrowers in financial distress and should be more accessible under certain circumstances. Current law is not designed to provide the “fresh start” envisioned by the Bankruptcy Code, but Congress has the ability to right this 45-year-old wrong.

We support a return to the framework that existed prior to 1990 that would permit discharge of student loans in bankruptcy once the loan had been in repayment for at least seven years. Under our proposal, the current statutory framework and applicable undue hardship requirements would continue to apply to student loans:

  • In repayment less than 7 years;
  • Owed by a borrower whose student loans had previously been discharged in bankruptcy; or,
  • Eligible to participate in an income-driven repayment plan that provides for monthly payments no greater than 15 percent of discretionary income with the possibility of loan forgiveness after no longer than 25 years.

Both Congress and ED have signaled that they are open to policy changes in this area. Last year, a bipartisan bill was introduced in the Senate that would allow borrowers to discharge certain student loans after they have been in repayment for 10 years. While this bill does not go as far as our proposal, AccessLex supports the bill and our President and CEO, Christopher P. Chapman, testified before the Senate Judiciary Committee regarding changes to the law to make it easier for borrowers to discharge their student loans in bankruptcy.

In October, an ED official told Congress that ED and the Department of Justice are working together to revise the agencies’ policies on the treatment of student loans in bankruptcy. No further information has been released about those potential changes, but the tide does seem to be shifting on ensuring that bankruptcy is a viable option for struggling student loan borrowers.

AccessLex will continue to work with Congress and the Biden Administration to craft policy changes that work better for students and borrowers. Read our bankruptcy proposal here