Which Private Student Loans Can Be Discharged Without Proving Undue Hardship?
Updated: Aug 16
One of the biggest misconceptions about bankruptcy is that every loan connected to education requires the borrower to prove undue hardship.
That is not necessarily true.
The first question is whether the particular debt falls within Bankruptcy Code § 523(a)(8).
If it does not, the borrower may not have to prove undue hardship at all.
Why This Distinction Matters
Many unsecured debts are ordinarily discharged in bankruptcy.
Certain education debts are treated differently because Congress specifically excluded them from the ordinary discharge unless statutory requirements are satisfied.
But the exception applies only to debts that actually fall within the categories Congress identified.
The label placed on the account by a lender is not enough by itself.
Qualified Education Loans
One category addressed by § 523(a)(8) involves certain “qualified education loans.”
Whether a loan satisfies that definition can depend on federal tax-law requirements incorporated into the Bankruptcy Code.
Important facts can include:
- the eligible student;
- the eligible educational institution;
- qualified higher-education expenses;
- the school’s cost of attendance;
- enrollment status; and
- how the loan proceeds were used.
Loans Above Cost of Attendance
Some private loans that exceed the school’s cost of attendance may fall outside the special bankruptcy protection that applies to qualified education loans.
That does not mean every loan above cost of attendance is automatically dischargeable.
It means the issue should be examined instead of assuming the debt survives bankruptcy.
Certain Schools and Programs
The type of school or educational program can also matter.
Some education loans connected with institutions or programs that do not meet the relevant statutory requirements may fall outside the protected category.
Less-Than-Half-Time Attendance
Enrollment status can also matter.
Certain private education loans made while the borrower was attending less than half-time may not qualify for the same special bankruptcy protection.
Again, the issue depends on the actual statutory requirements and the individual loan—not simply whether the money was used for education.
Bar Examination and Residency Loans
Some borrowers take out private loans for expenses such as:
- bar examination preparation;
- bar examination living expenses; or
- medical or dental residency-related costs.
Certain loans of this type may fall outside the category of qualified education loans protected by § 523(a)(8).
Why the Promissory Note Matters
Before deciding whether a private education loan survived bankruptcy, review the underlying loan documents.
Important information can include:
- the original lender;
- the stated purpose of the loan;
- the amount borrowed;
- the school attended;
- the educational program;
- enrollment status;
- whether the school certified the loan;
- the school’s cost of attendance; and
- how the loan proceeds were used.
The Bottom Line
Do not begin with:
“Was this called a student loan?”
Begin with:
“Does this debt actually satisfy the requirements of Bankruptcy Code § 523(a)(8)?”
If the answer is no, the borrower may not need to prove undue hardship at all.
For a broader overview of private student-loan options, see Private Student Loans: Your Legal Options When Payments Become a Problem.
Related Articles
What Happens to Private Student Loans After Bankruptcy?
Need Help Reviewing Your Loan?
A private education loan may require analysis of the loan documents and the circumstances under which the debt was incurred.
This article provides general educational information and is not legal advice. Laws and individual circumstances vary. Reading this article does not create an attorney-client relationship.
Comments