Student Loan Bankruptcy Law: Key Changes and Reform Bills (2024)

1. The Biden administration has introduced updated guidelines that are making it easier for federal student loan borrowers to seek debt relief through bankruptcy, with 99% of cases resulting in full or partial discharge based on government recommendations.

2. Several key bills have been introduced in Congress aimed at reforming student loan bankruptcy laws, but none have been passed.

3. There is increasing pressure from prominent lawmakers and public figures for significant changes to student loan bankruptcy law.
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Student loan bankruptcy law is changing in 2024, offering new opportunities for federal student loan borrowers and those with private loans.

New reforms and proposed legislation aim to simplify the process, making it easier for struggling borrowers to discharge student loans.

• The Biden administration has introduced updates that provide clearer pathways for loan relief.

• The U.S. Department of Education and the Department of Justice are working together to ensure these changes are implemented smoothly.

• Borrowers may now have a better chance of qualifying for loan discharge through bankruptcy.

While the “undue hardship” requirement remains a major barrier for most, updated guidelines give borrowers more hope.

Typically, borrowers must file for either Chapter 7 bankruptcy or Chapter 13 bankruptcy, depending on their financial situation. The type of bankruptcy filed can affect the likelihood of loan discharge.

Related: What Happens to Student Loans in Bankruptcy?

Borrowers who want to discharge federal student loan debt face the “undue hardship” requirement under the Bankruptcy Code, which is difficult to meet. This legal standard is often inconsistently applied, meaning the outcome of your bankruptcy court case can vary depending on where you file.

Related: How to Prove Undue Hardship for Student Loans

Recent reforms, including new guidelines from the U.S. Department of Education, are making it easier for borrowers—particularly federal student loan borrowers—to seek relief.

These changes could open the door for more struggling borrowers to use bankruptcy as a way to finally get out from under their debt by achieving a full or partial discharge of student loans.

Student loans first became more difficult to discharge in bankruptcy with the passage of the Bankruptcy Reform Act of 1978. Initially, only loans that had been in repayment for less than five years were protected from discharge. But this timeline changed over time, making it harder for borrowers to get relief.

The most significant shift came in 1998, when Congress passed the Higher Education Amendments. These amendments removed the five-year waiting period, making both federal and private student loans nondischargeable unless the borrower could prove “undue hardship,” a legal standard that’s notoriously difficult to meet.

Since then, additional laws and court rulings, including the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), further solidified the protections for student loans in bankruptcy, making it nearly impossible for most borrowers to discharge them.

Today, while reforms are underway, the “undue hardship” requirement remains the key barrier for borrowers seeking to discharge their loans through bankruptcy.

Under current bankruptcy law, discharging student loans requires proving undue hardship. The Brunner Test—the standard used by most bankruptcy courts—makes this difficult.

The test asks:

• Can you maintain a minimal standard of living while repaying your loans?

• Is your financial situation likely to improve?

• Have you made good faith efforts to repay the debt?

As part of the Brunner Test, borrowers must demonstrate how paying their student loans impacts their living expenses and financial stability.

While this has been a significant hurdle, recent legal actions, including those supported by the Biden administration, are beginning to shift how bankruptcy courts interpret these factors.

Related: Why Doesn’t Bankruptcy Clear Student Loans?

Recent federal guidelines are making it easier for borrowers to seek debt relief through bankruptcy. Bankruptcy courts are now more likely to discharge loans, with 99% of cases resulting in full or partial discharge of student loans based on government recommendations.

Between November 2022 and September 2023, 632 borrowers filed for bankruptcy under these updated guidelines, showing how more borrowers are taking advantage of these changes.

While these reforms are a step forward, experts like Senator Elizabeth Warren emphasize the need for better education for borrowers and bankruptcy attorneys to help navigate these new opportunities. Understanding how to prove undue hardship in relation to living expenses and financial circumstances is a critical part of the process.

I’ve tried to do my part by delivering training to bankruptcy lawyers nationwide, speaking at events like the National Association of Consumer Bankruptcy Attorneys and FinCon conventions to help attorneys and borrowers better understand how to use these new guidelines.

Several key cases are reshaping how courts handle student loan bankruptcy discharge, potentially making it easier for borrowers to find relief:

• Alrena Dale Case: Dale successfully discharged $155,000 in student loans under the Department of Justice’s new process. This bankruptcy case signals a shift toward more favorable outcomes for borrowers, especially when schools fail to deliver promised results.

• CFPB Lawsuit Against PHEAA: This lawsuit against loan servicer PHEAA for illegally collecting payments on discharged loans could lead to stricter enforcement of bankruptcy filings, protecting borrowers from improper collection practices.

• Reynolds v. Pennsylvania Higher Education Assistance Agency: In this case, the court discharged the borrower’s loans due to mental health and financial strain, reflecting a more compassionate interpretation of the undue hardship standard, which may help future borrowers.

• Navient Class Action Lawsuit: Borrowers challenged the dischargeability of certain private student loans that exceeded the cost of attendance. The settlement helped set a precedent for relief for private loan borrowers outside traditional education loan categories.

Over the past few years, there has been growing support for reforming how student loans are treated in bankruptcy. Several bills introduced in Congress aim to make it easier for borrowers to discharge student loans, but they face political challenges, and none have passed yet.

Key legislative efforts include:

• H.R. 9931 – Student Borrower Bankruptcy Relief Act of 2024: Introduced in September 2024 by House Representatives Nadler and Correa, this comprehensive legislation would allow borrowers to discharge student loans through standard bankruptcy proceedings by eliminating the “undue hardship” requirement in Section 523 of the Bankruptcy Code. This would treat student loans like other common consumer debts, such as credit card balances, medical bills, and personal loans.

• H.R.138 – Private Student Loan Bankruptcy Fairness Act of 2023: This bill proposes making private student loans dischargeable under more lenient conditions by removing the “undue hardship” standard.

• S.2598 – FRESH START Through Bankruptcy Act of 2021: Sponsored by Senate Majority Whip Dick Durbin, this bill would allow federal student loans to be discharged after 10 years of repayment, removing the need to prove undue hardship.

• H.R.306 – Stopping Abusive Student Loan Collection Practices in Bankruptcy Act of 2023: This lesser-known bill seeks to award attorney’s fees to debtors if loans are discharged due to undue hardship, discouraging creditors from aggressively contesting valid cases.

Prominent lawmakers, including Senator Elizabeth Warren and Senate Majority Leader Chuck Schumer, are pushing for significant changes to student loan bankruptcy law. In a May 2024 letter to the Department of Justice, Warren and Senator Sheldon Whitehouse called for stronger action to encourage borrowers to seek relief.

Schumer has also publicly criticized the current system, saying: “It’s outrageous that other people get to declare bankruptcy, but students can’t.” Federal Reserve Chairman Jerome Powell expressed similar support in 2018, questioning why students are unable to discharge their loans in bankruptcy.

Ongoing Political Challenges

Despite bipartisan support for the Fresh Start Through Bankruptcy Act and growing pressure from figures like Senator Warren, progress has been slow. No votes have been scheduled, and political resistance remains. Legislative gridlock continues to stall movement, with key voices like Florida Governor Ron DeSantis adding to the debate, advocating for student loans to be treated like any other loan.

For now, while these bills show promise, borrowers should remain cautious as the legislative landscape evolves.

The future of student loan bankruptcy law is shifting, though no new laws have been passed yet. Several factors are driving the push for change, making it easier for borrowers to discharge their loans:

• Economic Factors: Rising student loan defaults and financial struggles following the pandemic are increasing the urgency for reform. As the economic toll grows, lawmakers may be forced to reconsider the current system.

• Borrower Advocacy: Organizations like the Student Borrower Protection Center are pushing for fairer bankruptcy proceedings. Their efforts highlight the challenges borrowers face and keep pressure on lawmakers to act.

• Political Shifts: Support for reform is growing in Congress. Lawmakers such as Senator Elizabeth Warren and Senate Majority Leader Chuck Schumer are advocating for changes to make student loan discharge more attainable.

While no new bills are advancing at the moment, developments like the proposed Navient settlement and the Department of Justice’s new guidelines show that the system is slowly shifting in favor of borrowers.

Although there are no scheduled votes on major reform bills like the FRESH START Through Bankruptcy Act, momentum is building. Recent policy changes and advocacy efforts are signs that reform is becoming more likely, but substantial changes may take time.

Key factors to watch include:

• Increase in Adversary Proceedings: More borrowers are pursuing relief through adversary proceedings, especially since the DOJ introduced its updated guidelines. This trend is likely to continue as more people become aware of these changes.

• Public Advocacy Milestones: Public hearings and congressional discussions will be crucial in advancing reform. Advocacy groups are expected to play a significant role in pushing these conversations forward.

• Court Cases: Ongoing lawsuits, such as the Navient class action, could set legal precedents that shape the future of student loan discharge through bankruptcy. Borrowers should stay informed about key rulings.

For now, borrowers should focus on their current options, such as federal student loan relief programs or bankruptcy settlements. Staying updated on legal developments will be crucial as the situation evolves.

Student loan bankruptcy laws are evolving, and while it’s still difficult to discharge your loans, new federal guidelines and legislative efforts are paving the way for change.

Understanding the current options and staying informed about upcoming reforms could make all the difference for borrowers like you.

Whether it’s taking advantage of the new DOJ guidelines or keeping an eye on reform bills that could reshape the process, being proactive is key.

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