Streamlined Bankruptcy Rules Lead to More Student Loan Discharges

A new analysis finds that a simplified bankruptcy process introduced three years ago has substantially increased the share of student loan borrowers who win discharges. Professor Jason Iuliano’s study in The American Bankruptcy Law Journal reports an 87 percent success rate for borrowers seeking to discharge most or all of their federal student loans in bankruptcy, based on roughly 650 completed cases filed from mid-October 2022 through mid-November 2023.

That compares with a 61 percent rate in 2017 and more than double the rate from nearly two decades ago. The increase is largely tied to guidance from the Justice and Education Departments and a streamlined procedure that lets borrowers use a 15-page attestation form and meet eased criteria for the traditional Brunner undue-hardship test.

Under the newer approach, aspects of the Brunner test can be satisfied by checking boxes — for example, allowed expenses that equal or exceed income can meet one prong, and being over 65 or having loans in repayment for at least 10 years can meet another. If the Education Department’s analysis finds a borrower has met the test, Justice Department lawyers can recommend a discharge to a bankruptcy judge.

But the streamlined process has reached only a small share of distressed borrowers. Iuliano estimates that historically 99 percent of student loan debtors who filed for bankruptcy did not ask for a discharge.

Key Topics

Science, Business, Student Loans, Bankruptcy, Education Department, Courts, Personal Finance