Bankruptcy and Student Loans: The “Undue Hardship” Factor

      As tuition rates climb to an all time high, it is not unusual to hear of students leaving college with 40, 50, or even 60 thousand dollars of debt. Many law and medical students are graduating from school with a degree in one hand and 100 thousand dollars in student loans in the other. This continuing increase in tuition has many eager students pursuing community colleges over four year universities. [1] For example, Mott Community College's Michael Kelly states that enrollement has been up 28 percent in the last five years. [2] Kelly says that for some the choice is simple and "[t]he higher the cost is, the more students we get." [3]

      The increase in tuition has lead many students to even pursue different career routes. Take for example Mayrose Wegmann, a 2004 alumnus from the University of Iowa graduating with a degree in political science and journalism, who "should have been starting on her dream career as a political consultant by now." [4] Instead, Wegmann has decided to work for a non-profit organization because the pay is "significantly more than entry-level politics work." [5] Wegmann, focused on paying back her student loan, expressed that "[t]he school debt makes you decide [about your career] based on the money factor. Not based on what you want to do." [6] Mayrose Wegmann is just one of many placed in this predicament, and this real life dilemma has become a common concern among pre-college teens.

      Student loans will have many college scholars paying monthly installments of over 200 dollars for the next 30 years. As if that wasn’t enough to scare pre-college teens from attending college, SallieMae, a leading provider of student loans, states that "[i]f you're having serious trouble paying back your debt, bankruptcy is not an easy out. In fact, bankruptcy should be considered an absolute last resort. And, after all your effort, student loans are not normally included in a bankruptcy filing." [7] Congress enacted Section 523 of the Bankruptcy Code as somewhat of a "high hurdle for debtors seeking to discharge student loan obligations" to prevent a debtor from receiving all the benefits of a financed education and than being able to discharge the education loan in a bankruptcy. [8] Under Section 523, a debtor is only allowed the discharge of student loans when a failure to discharge this debt would impose undue hardship on the debtor. [9] 11 U.S.C.A. § 523(a)(8) states:

       (a) A discharge under [the Bankruptcy Code] does not discharge an individual debtor from any debt-

      (8) for an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents;

The debtor has the burden of proving, by a preponderance of the evidence, that repayment of the educational loan will impose undue hardship. [10] To establish "undue hardship" the majority of the courts have adopted a three-prong test which was established in Brunner v. N.Y. State Higher Educ. Servs. Corp, 831 F.2d 395 (2d Cir. 1987). [11] Under the Brunner test, a debtor must prove that: "(1) debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her dependents if forced to repay the loans, (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans, and (3) debtor has made good faith efforts to repay the loans." [12] All three elements must be satisfied in order for the bankruptcy court to grant that the debt be discharged. [13]

      If a debtor is considering bankruptcy, the existence of prong one may be self evident. Nonetheless, in order to satisfy the first prong, the debtor must illustrate to the court that he or she " could not maintain, based on current income and expenses, a "minimal" standard of living if forced to pay the loans." [14]

      The second prong of the Brunner test considers the debtor’s ability to fulfill his or her financial commitments. The potential future earnings of a debtor are an important factor when determining whether a student loan should be discharged. As illustrated in prong two, this test requires evidence that the debtor not only in his current situation is unable to pay back the loan due to undue hardship, but additionally that there is a strong suggestion that the debtor will be unable to pay back the loan in the future. The rationale behind this element can be illustrated by a recent college graduate. Normally, a recent college graduate’s salary will be low; thus, he or she might have difficulty in initially paying back the loan. However, overtime time, the recent college graduate’s salary should increase; as a result, the undue hardship may not exist. Accordingly, a debtor must demonstrate that the undue hardship is not only a current state of affairs; it is also a condition that will persist. "The debtor must precisely identify his or her problems and explain how that condition would impair his or her ability to work in the future." [15] Consequently, temporarily unemployment, temporarily injuries, etc., may place an individual in undue hardship for a period of time; however, the courts place much emphasis on the longevity of the hardship.

      The last prong of the Brunner test focuses on the good-faith effort of the debtor to try to pay back the loan. The third element is considered to be an underlying policy test, "which considered the amount of student loan debt, the percentage of indebtedness, and the benefit from education."[16] Bankruptcy Courts use this prong to determine, as illustrated in the Sixth Circuit in In Re Tirch, whether the loan should be partially or wholly discharge as not to frustrate the congressional policy underlying 11 U.S.C.A. § 528(a)(8). [17] To fulfill this requirement, the debtor must show that he or she made a good-faith effort to pay the loan back not only in the past, but as well as tried to position himself or herself to pay back the loan in the future, such as by applying to jobs, minimizing other spending, etc.

      The Bankruptcy Code does permit the discharge, or partial discharge, of student loans only when the debt would "impose an undue hardship on the debtor." [18] In most cases where a debtor succeeds, he or she has illustrated that the circumstances are out of his or her control; rather that this burden is not a borne free choice. "These circumstances may include, but are not limited to illness, disability, lack of job skills." [19] Nonetheless, the few individuals that are actually successful in discharging their student loans in a bankruptcy are not completely out of the woods. A bankruptcy filing may stay on one’s credit report for up to ten years and can affect the ability for the debtor to receive future loans. [20]

      Many young adults are now facing the burdens of student debt; some are changing career paths, delaying marriages, and even foregoing having children. [21] The undue hardship factor is an extremely difficult element to prove and is, for the most part, only satisfied when a debtor is unable to work and any employment in the future is non-existent. [22] Bankruptcy does not come without consequences and is not the ideal path for a debtor to take to extinguish his or her student loan debts. Before a debtor looks to bankruptcy, he or she should contact their lenders to see if there are other options.

[1], College Tuition On The Rise, (last visited Oct. 31, 2007).

[2] Bisi Onile-Ere, College tuition costs on the rise, (last visited Nov. 1, 2007).

[3] Id.

[4] Christian Zappone, Loans – A Life Sentence,, (May 2, 2006) available at (hereinafter Zappone, Loans – A Life Sentence).

[5] Id.

[6] Id.

[7], Bankruptcy and Student Loans, (last visited Nov. 2, 2007).

[8] 8b C.J.S. Bankruptcy § 1078 (2007).

[9] In Re Alderte, 412 F.3d 1200, 1204 (10th Cir. 2005).

[10] Id. at 1204 (citing 11 U.S.C. § 523(a)(8)) (emphasis added).

[11] No. 8 Bankruptcy Service Current Awareness Alert 6 (2007).

[12] In Re Alderte, 412 F.3d at 1205.

[13] 3 Norton Bank. L. & Prac. 2d § 47:52.

[14] No. 8 Bankruptcy Service Current Awareness Alert 6 (2007).

[15] In Re Tirch, 409 F.3d 677, 681(6th Cir. 2005).

[16] 8b C.J.S. Bankruptcy § 1078.

[17] 9D Am. Jur. Bankruptcy § 3672 (2007).

[18] Id.

[19] 11 U.S.C.A. § 523(a)(8).

[20] No. 8 Bankruptcy Service Current Awareness Alert 6 (2007).

[21] Zappone, Loans – A Life Sentence, supra note 5.

[22], Student Loans in Bankruptcy,, (last visited Nov. 5, 2007).