There are many myths surrounding the topic of discharging student loans in bankruptcy. Some say you can’t do it. Others say you can discharge student loans only if you can prove hardship. Still others say you can discharge private student loans, but not federal student loans. Wrong, wrong, and wrong.
All debts are discharged in bankruptcy unless there is an exception. One exception is for student loans, but only certain types of student loans. To qualify for the exception to discharge, the student loan must first meet the requirements of Section 523(a)(8) of the Bankruptcy Code. Non-dischargeable student loans include loans that:
(1) have been made under a government or nonprofit student loan program, or
(2) are qualified educational loans for attending an eligible education institution as defined by the Internal Revenue Code.
The loan must also be incurred to pay costs of attendance as defined in Section 472 of the Higher Education Act.
There are two types of student loans: federal and private. Federal student loans nearly always fall under the exception in Section 523(a)(8), but private student loans sometimes do not qualify. For example, some for-profit technical or trade schools do not qualify as an “eligible education institution” because the school is not accredited under Title IV of the Higher Education Act. There may also be defects in the loan, like it was not incurred to pay costs of attendance. If a private student loan does not meet one of the criteria for a non-dischargeable student loan, the debt can be discharged in a Chapter 7 or Chapter 13 bankruptcy case and the exception listed in Section 523(a)(8) does not apply. Section 221(d) of the Internal Revenue Code contains a lengthy list of requirements which must be met before a loan can qualify as a student loan. If the loan fails to meet these criteria, the debtor may be able to discharge them in bankruptcy.
Student loans may be sold or transferred to several different companies during the repayment term. The debtor may not remember the original lender for a loan taken years earlier. How does a debtor discover whether a student loan is private or federal? Simply go to the National Student Loan Data System (NSLDS) at www.nslds.ed.gov and enter personal information. The debtor will need to recall a PIN number, but this information may be retrieved if not remembered. The NSLDS will display a list of all federal student loans for the debtor. If a loan is not listed on this database, it is a private student loan.
Student loans can be a heavy burden. Fortunately, there are many options for repayment, deferment, reduction, and even discharge for federal student loans. Discuss your student loans with your attorney and review your legal options. In many cases bankruptcy can eliminate other debts that can allow you to afford repayment, or you can temporarily pay a reduced amount during a Chapter 13 bankruptcy. Your bankruptcy attorney is able to help you decide on a reasonable and affordable strategy for dealing with student loan debt.