How Student Loans Became So Difficult to Discharge in Bankruptcy

Published Thursday, March 26th, 2026 by Attorney Dave Falvey - 149 views

There was a time when student loans were treated much differently in bankruptcy than they are today. In the earlier years of federal student lending, they were generally handled like other unsecured debts.

A person who filed bankruptcy and received a discharge could often eliminate student loan debt in the same way they could eliminate credit card and medical debts or other ordinary obligations.

Student Debt Had Not Become Massive Yet

That earlier approach reflected a very different legal and financial environment. Student debt had not yet become the massive category of long-term consumer debt that it is today.

There were fewer restrictions, less specialized treatment, and no separate legal standard that placed student borrowers in a uniquely difficult position.

The Bankruptcy Act of 1898

From 1970 through to 1975 bankruptcy was governed by the Bankruptcy Act of 1898 rather than the Bankruptcy Code people know today.

During that period student loans were fully dischargeable. There was no waiting period. There was no “undue hardship” test. There was no special exception in the law that treated education debt differently from other unsecured obligations.

If a borrower qualified for bankruptcy relief and received a discharge, the student loan could be included.

Congress Introduces the First Meaningful Restriction

The bankruptcy laws began to change in the mid-1970s. In 1976 Congress introduced the first meaningful restriction on the discharge of student loans. This did not make them permanently nondischargeable, but it did create a new barrier. Under the revised approach student loans could still be discharged if one of two conditions was met.

First the borrower could obtain a discharge if five years had passed since repayment began. Second, the debt could be discharged if repayment would impose an undue hardship.

That was the first major shift away from the original model. It marked the beginning of a policy trend that gradually separated student loans from the rest of consumer debt.

Rather than being treated as ordinary unsecured debt, student loans started to receive special protection.

Eventually Student Loans Became Presumptively Nondischargeable

A more serious change arrived on October 1, 1979 when student loans became presumptively nondischargeable under 11 U.S.C. § 523(a)(8). That change carried major consequences. It meant that in most cases student debt would survive bankruptcy unless the borrower could fit within a narrow exception. This in turn meant that bankruptcy was no longer functioning as a straightforward exit for many people burdened by education debt.

The scope of that protection expanded further in 1984. Nondischargeability was extended beyond direct government-backed student loans to include nonprofit lenders and education finance organizations. This broadened the categories of education-related debt that were protected from discharge and strengthened the overall legal shield around student lending.

The Brunner v. New York State Higher Education Services Corp. Case

Another important development came in 1987 with Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987). That case established the well-known Brunner test which courts have used to evaluate whether a borrower meets the undue hardship standard.

The test is demanding. In general terms the borrower must show three things: first, that repaying the loan would prevent the borrower from maintaining a minimal standard of living; second, that the hardship is likely to persist for a significant portion of the repayment period; and third, that the borrower has made good faith efforts to repay the debt.

This standard made student loan discharge far more difficult in practice. It was no longer enough to show financial strain or even serious financial hardship and borrowers often had to prove that their situation was severe, ongoing, and unlikely to improve.

The Lending Market Also Changed

As the legal protections around student loans increased, the lending market also changed. Private student lending expanded, and student loans became part of larger financial markets through securitization, including student loan asset-backed securities, sometimes referred to as SLABS.

As more money flowed into education lending, student debt increasingly resembled a protected financial product rather than a typical unsecured consumer obligation.

Concerns About Abuse in the Student Loan and Education System

At the same time criticism grew around misconduct and abuse within parts of the student loan and education system. Concerns have included predatory schools, misapplied payments, servicing errors, and deceptive practices. For many borrowers these problems made already difficult debt even harder to manage.

Student Loans Are Currently One of the Largest Categories of Consumer Debt in the United States

Today student loans remain one of the largest categories of consumer debt in the United States. They stand alongside mortgages, auto loans, and credit card debt as a major part of the household debt landscape.

The difference is that student loans have long carried unusually strong protections against discharge in bankruptcy which has made them a particularly lasting financial burden for many borrowers.

What was once dischargeable like other unsecured debt, gradually turned into one of the hardest obligations to eliminate in bankruptcy. That shift in the law and policy has had lasting consequences for borrowers, and especially those facing long-term financial hardship.

If you currently have student loan debt, don’t despair. Student loan debt can still be discharged in bankruptcy, but the outcome will depend on your facts, your timing, and whether your situation meets the legal standard.