Hardship Discharge of Student Loans: Lessons from a Law Student’s Case

Student loan debt is often described as virtually impossible to escape in bankruptcy, but that reputation is only partly deserved. Under the right circumstances, borrowers can obtain a hardship discharge of student loans. A recent case involving a law student in the Ninth Circuit illustrates how a borrower can successfully demonstrate that repayment would be an undue hardship and obtain relief from overwhelming educational debt.

This article uses that law student’s case as a springboard to explain the legal framework for discharging student loans, how the courts analyze undue hardship, and what practical lessons borrowers and practitioners can draw from modern case law and policy guidance.

Student Loans in Bankruptcy: Why They Are Treated Differently

Most unsecured debts, such as credit card balances or medical bills, are routinely discharged in consumer bankruptcy. Student loans, however, are governed by a special rule in the Bankruptcy Code, found in 11 U.S.C. § 523(a)(8), which generally makes educational debt non-dischargeable unless the borrower proves that repayment would impose an undue hardship.

Section 523(a)(8) identifies several categories of educational debt that are presumptively excepted from discharge:

• Government-backed or nonprofit student loans (e.g., federal loans or loans guaranteed by a governmental unit).
• Qualified education loans owed to private lenders that meet specific criteria under the Internal Revenue Code.
• Obligations to repay funds received as an educational benefit, scholarship, or stipend from designated entities.

If a debt falls into one of these categories, the borrower does not receive an automatic discharge. Instead, the borrower must affirmatively seek a determination that the loan should be discharged due to undue hardship, typically through a separate adversary proceeding in the bankruptcy case.

The Law Student’s Case: What Made Hardship Discharge Possible?

In the Ninth Circuit case that inspired this discussion, a law student facing substantial student loan debt persuaded the bankruptcy court that continuing to repay the debt would be an undue hardship. Although each case turns on its own facts, several elements often appear in successful hardship discharge decisions:

• Evidence of limited current income and necessary expenses leaving little or no room for loan payments.
• Documentation of ongoing constraints on future earning potential, such as health issues or caregiving responsibilities.
• Proof of good faith efforts to handle the loans, including attempts at repayment, forbearances, or income-driven plans.

In the law student’s situation, the court scrutinized not only the borrower’s present financial picture but also the realistic prospects after law school and bar admission. The debtor had to convince the court that even with a professional degree, circumstances made it unlikely that a standard repayment schedule could ever be maintained without falling below a minimal living standard.[10]

Understanding Undue Hardship: The Brunner Test and Alternatives

The central legal question in any student loan discharge case is whether repayment would impose an undue hardship. Because the Bankruptcy Code does not define this phrase, courts have developed judicial tests to apply the standard. The dominant framework across many circuits, including the Ninth, is known as the Brunner test, named after the Second Circuit case Brunner v. New York State Higher Educ. Servs. Corp.

The Three Prongs of the Brunner Test

Under Brunner, a debtor must establish three elements by a preponderance of the evidence:

• Minimal standard of living — The debtor cannot maintain, based on current income and expenses, a minimal standard of living for themselves and their dependents if forced to repay the student loans.
• Persistence of hardship — Additional circumstances indicate that the debtor’s constrained financial situation is likely to persist for a significant portion of the repayment period.
• Good faith — The debtor has made good faith efforts to repay the loans, which may include prior payments, attempts to negotiate, or enrollment in available repayment programs.

Courts often emphasize that all three prongs must be satisfied before a discharge is granted. This creates a high bar and explains why hardship discharge of student loans has historically been rare.

Alternative Approaches: Totality of the Circumstances

Some circuits use a more flexible “totality of the circumstances” approach instead of Brunner. Under that test, courts consider:

• Past, present, and reasonably reliable future financial resources.
• Reasonable and necessary living expenses.
• Any other relevant facts bearing on the debtor’s ability to repay.

While the Ninth Circuit has generally followed Brunner, evolving case law and policy guidance are nudging courts toward a more practical, evidence-driven analysis that may, in effect, soften the historically rigid application of undue hardship.

How Courts Evaluate the Debtor’s Financial Reality

The law student’s case underscores that courts do not decide hardship discharge in the abstract. Judges carefully examine documentation and testimony about the debtor’s financial life. Recent guidance from the U.S. Department of Justice offers a structured approach for government attorneys evaluating undue hardship claims, which indirectly signals how courts may be thinking about the issue.

Income, Expenses, and Minimal Standard of Living

For the first Brunner prong, courts look at whether the debtor can maintain a minimal standard of living while making the required student loan payments. Federal guidance suggests using IRS Collection Financial Standards to identify reasonable and allowable expenses and then comparing those to the debtor’s income.

If allowable expenses equal or exceed income, the debtor typically satisfies the minimal standard of living factor. If income provides meaningful discretionary funds sufficient for full loan payments, undue hardship is not established for this prong.

Future Prospects and Additional Circumstances

For the second prong, courts ask whether the debtor’s difficulties are likely to continue for a substantial portion of the repayment period. Key considerations include:

• Chronic health problems or disabilities affecting employment.
• Age and realistic career trajectory.
• Dependents or caregiving obligations.
• Local job market and applicable professional licensing hurdles.

In the law student’s case, the court considered the transition from school to practice, the likelihood of bar passage, and the realistic income the debtor could earn in the early years of a legal career. The debtor had to demonstrate that even after completing the degree and entering the profession, repayment would remain unmanageable.[10]

Good Faith Efforts to Repay

The third prong of Brunner examines good faith. Courts typically look for indications that the debtor did not recklessly ignore repayment obligations. Examples include:

• Making payments when able, even if only partial.
• Seeking deferments, forbearances, or income-driven repayment plans.
• Communicating with servicers about financial distress.
• Avoiding excessive luxury spending or deliberately underemployment.

Recent DOJ guidance encourages government attorneys to view good faith holistically, rather than demanding exhaustion of every administrative option, particularly where those options would not change the underlying inability to repay.

Legal Nuances: What Counts as a Student Loan?

An important doctrinal development in the Ninth Circuit is the recognition that not all education-related debts are student loans for purposes of Section 523(a)(8). In some cases, borrowers have successfully argued that particular obligations fall outside the statutory categories and are therefore dischargeable without any undue hardship showing.

Key distinctions include:

• Loans paid directly to students versus funds paid to educational institutions.
• Private loans to attend non-qualified institutions, such as certain vocational or bar preparation programs.
• Conditional grants or stipends tied to employment obligations rather than general educational financing.

Ninth Circuit decisions and scholarly analysis have noted that private loans to non-qualified schools and funds covering costs beyond official “cost of attendance” may fall outside Section 523(a)(8), making discharge easier. The law student case sits within this evolving landscape, where courts more closely scrutinize how and why the debt was incurred.

Policy Shifts: DOJ and Education Department Guidance

In November 2022, the U.S. Department of Justice issued detailed Student Loan Discharge Guidance to federal attorneys handling undue hardship claims in bankruptcy. In 2023, the U.S. Department of Education clarified that loan holders can rely on this process when evaluating hardship discharge requests in adversary proceedings.

These developments are significant because they:

• Encourage a more consistent, transparent analysis of undue hardship claims.
• Recognize the legitimacy of full or partial discharges when borrowers cannot maintain a minimal standard of living.
• Signal greater openness to settlement or stipulated discharge outcomes, reducing litigation burdens on debtors.

When a law student or any borrower seeks hardship discharge today, government attorneys evaluating federal loans are expected to follow this framework, which may increase the likelihood of relief where evidence strongly supports undue hardship.

Practical Takeaways for Borrowers and Practitioners

The law student’s success in obtaining a hardship discharge offers several practical lessons for others considering bankruptcy to address student loan burdens.

Key Strategies for Building a Strong Undue Hardship Case

• Document everything: Maintain thorough records of income, expenses, medical conditions, job applications, and loan servicing communications.
• Be realistic about future earnings: Courts favor grounded projections, not optimistic assumptions. Present credible evidence about expected income and expenses.
• Demonstrate good faith: Show efforts to repay or responsibly manage the debt, even when full payment was impossible.
• Assess loan classification: Determine whether all education-related debts truly fall under Section 523(a)(8), as some may be dischargeable without hardship.
• Consider partial discharge: DOJ guidance acknowledges that partial discharge may be appropriate when the debtor can pay some but not all of the debt.

Table: Comparing Brunner Test and Totality of Circumstances

Frequently Asked Questions (FAQs)

1. Can law students or recent graduates really get their student loans discharged?

Yes, but only in limited circumstances. Law students and graduates must show that repaying their loans would be an undue hardship under the applicable test, often Brunner. Successful cases typically involve compelling evidence of long-term constraints on earning capacity, substantial necessary expenses, and genuine efforts to manage the debt.[10]

2. Does the court automatically consider hardship when I file bankruptcy?

No. Section 523(a)(8) requires a separate hardship determination. Debtors must usually file an adversary proceeding and actively seek a ruling on whether their student loans should be discharged due to undue hardship.

3. Are federal and private student loans treated the same?

Federal and many private loans are both covered by Section 523(a)(8), but the statute distinguishes between government-backed loans, qualified private education loans, and other educational benefits. Some private debts associated with non-qualified schools or nontraditional programs may fall outside the section and be dischargeable without hardship.

4. What role do recent DOJ and Education Department policies play?

Recent guidance from the Department of Justice and Department of Education encourages a more structured, evidence-based evaluation of undue hardship claims involving federal student loans. These policies may make it easier for debtors with strong cases to obtain full or partial discharge, often through negotiated outcomes rather than contested trials.

5. Is partial discharge of student loans possible?

Yes. DOJ guidance explicitly recognizes that partial discharge may be appropriate when a debtor can reasonably afford to pay a portion of the loan but not the full balance while maintaining a minimal standard of living. Courts have the equitable authority to tailor relief to the debtor’s circumstances.

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Author

medha deb

 

Medha Deb is an editor with a master's degree in Applied Linguistics from the University of Hyderabad. She believes that her qualification has helped her develop a deep understanding of language and its application in various contexts.

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