Department of Justice Issues New Guidance on Discharging Federal Student Loans in Bankruptcy

By Jill Desjean, Senior Policy Analyst

The Department of Education (ED) on Thursday announced the culmination of a joint effort with the Department of Justice (DOJ) to develop a new process for federal student loan bankruptcy discharge cases in the interest of a more equitable, consistent, and transparent process for borrowers. The DOJ memo included with the guidance stressed a desire to reduce burden for both borrowers and attorneys in pursuing bankruptcy discharges.

The initiative resulted in new guidance to U.S. attorneys establishing clearer standards for recommending federal student loan discharge to bankruptcy judges, who continue to have the final say on whether a claim merits bankruptcy discharge.  

Federal student loans have been historically difficult to discharge through bankruptcy because they are held to a higher standard than other debts in bankruptcy filings. Borrowers must demonstrate that they will suffer undue hardship if their loans are not discharged, which includes an inability to maintain a minimal standard of living while making loan payments, as well as evidence that this inability will persist into the future.

While the undue hardship provision remains in statute, the new guidance seeks to streamline the bankruptcy discharge process to make it easier for borrowers to request and receive discharge.

The guidance stipulates that the undue hardship standard is met — and that bankruptcy discharge be recommended to the court — if the following three conditions are met:

  1. the debtor presently lacks an ability to repay the loan; 
  2. the debtor's inability to pay the loan is likely to persist in the future; and 
  3. the debtor has acted in good faith in the past in attempting to repay the loan.

To simplify the fact-gathering process in establishing undue hardship, the guidance includes a new attestation form borrowers will complete in support of their requests. 

The guidance also stipulates DOJ attorneys are expected to consult with ED on all cases. ED, in turn, will provide the borrower's education and debt history — including whether the borrower has made good faith efforts to repay — along with a recommendation on whether discharge is warranted. 

In establishing whether to grant bankruptcy discharge, courts generally rely on one of two frameworks: the so-called "Brunner test" or a "totality of circumstances" test. Both are similar in that they examine the borrower's past efforts to pay their debt, whether student loan payments negatively impact the borrower's ability to meet living expenses, and whether their financial circumstances are likely to persist into the future. The new guidance applies in jurisdictions that use either of the two tests. 

Moving forward, DOJ intends to hold informational sessions in the next few weeks for attorneys with opportunities for questions on the new guidance. DOJ also pledged to evaluate how the new process works in practice and appear open to changes based on what it learns over the first year and beyond.


Publication Date: 11/21/2022

Jeff A | 11/21/2022 2:24:32 PM

With so many options to not pay back some or all of your student loans. From a strictly ROI perspective, is the best advice when paying for your education to borrow, borrow, and borrow some more? Seems like a good chance you will pay back less than you borrowed.

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