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When student loan payments get burdensome, the idea of discharging your loans altogether through bankruptcy may start to sound like the next best option. Through bankruptcy, you would be completely off the hook for that large chunk of debt.
But filing for bankruptcy in any scenario is a huge financial decision — and typically a last-ditch effort. Bankruptcy stays on your credit report for seven to 10 years, making it destructive to your credit. It’s also extremely difficult to do when it comes to eliminating your student loans.
“We’ve had clients who have tried to get a bankruptcy discharge on federal student loans, but they’re unsuccessful the vast majority of the time,” says Travis Hornsby, founder of Student Loan Planner. “If your income is above the poverty line and you don’t have a permanent disability, your chances are slim.”
In order to file bankruptcy on student loans, borrowers have to meet a multi-part test proving that they have no chance of ever being able to pay the debt back. They have to demonstrate that paying their student loans would cause them “undue hardship.”
“Congress didn’t define what it meant by ‘undue hardship,’ so it was left to the courts to decide,” says higher education expert Mark Kantrowitz. As such, courts use a common method called the Brunner Test to evaluate whether or not a borrower qualifies for student loan discharge through bankruptcy. Through the Brunner Test, a borrower must prove the following:
- A present inability to repay the debt while maintaining a minimal standard of living;
- A high likelihood that these circumstances will persist for most of the loan’s normal repayment term; and
- A good faith effort to repay the loans using options for financial relief like deferments, forbearances and income-driven repayment
How to demonstrate “undue hardship”
“Bankruptcy discharge of student loans is very rare, but not completely impossible,” Kantrowitz adds.
According to Kantrowitz, these are some circumstances in which borrowers have been able to demonstrate “undue hardship:”
- The borrower is disabled, but the private student loan does not offer a disability discharge.
- The borrower has a disabled dependent, which affects the borrower’s ability to work full time while caring for the dependent, or where the cost of caring for the dependent yields a higher minimal standard of living.
- The borrower has very low income and limited prospects for increasing income.
- Alimony and child support obligations reduce the borrower’s net income, affecting the ability to maintain a minimal standard of living while repaying the student loan debt.
- The borrower has a high cost of living due to where they are living (i.e., New York City, Los Angeles, San Francisco, Boston), which affects the minimal standard of living threshold.
- The college degree was worthless and does not enable the borrower to earn enough to repay the debt.
- The amount of debt is excessive compared with the borrower’s income, making it difficult to repay the debt. For example, a grandparent cosigned a private student loan for a grandchild and is now retired on fixed income.
Obtaining a bankruptcy discharge of your student loans is not easy, and fortunately there are other steps desperate borrowers can take before making this last-ditch effort.
“In proceedings where clients of ours have tried [filing for bankruptcy], if they can’t prove that they have no hope of paying back the debt, then the Department of Education usually responds by telling the borrower to enroll in an income-based repayment plan,” Hornsby explains.
Federal income-driven repayment plans recalculate your monthly bill based on any changes in your income. Your monthly student loan payment is therefore reflective of how much you can afford to pay.
Hornsby suggests income-driven repayment plans such as Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE). With these programs, your credit score won’t be ruined like it would in bankruptcy proceedings, plus you’ll only need to pay 10% of your discretionary income. After the repayment period ends, any remaining balance is forgiven.
Is your monthly student loan payment just too high?
If your monthly payment is just too high, consider refinancing your student loans. Through refinancing, you can both score a lower interest rate and extend your loan term so that your monthly payments are lower. Though this means more months, or years, of interest collecting, it can help you in the immediate term if you are tight on cash.
SoFi Student Loan Refinancing offers both variable and fixed interest rates, low interest rates, various loan terms, no application or origination fees, refinancing protections, plus it allows for a co-signer. Read Select’s full review of SoFi Student Loan Refinancing.
With the federal student loan payment and interest freeze that’s currently in place through Sept. 30, 2021, we recommend only private student loan borrowers refinance at this time. Keep in mind that refinancing your federal student loans, even once the freeze ends, means you lose governmental protections like income-driven repayment plans and any type of loan forgiveness.
No origination fees to refinance
Federal, private, graduate and undergraduate loans, Parent PLUS loans, medical and dental residency loans
Variable rates (APR)
From 2.24%; from 2.37% for medical/dental residents (rates include a 0.25% autopay discount)
Fixed rates (APR)
From 2.99%; from 3.12% for medical/dental residents (rates include a 0.25% autopay discount)
From $5,000; over $10,000 for medical/dental residency loans
Minimum credit score
Allow for a co-signer
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.