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Student loans have long been considered difficult, if not impossible, to discharge in bankruptcy. However, new research has recently found that this is not the case.
The success rate of student loan borrowers seeking to have their debts discharged in bankruptcy has “jumped” to 87%, according to an analysis published this month in the American Bankruptcy Law Journal by Jason Iuliano, a professor at the University of Utah’s S.J. Quinney School of Law. In 2017, the bankruptcy success rate for education loan holders was 61%, compared to 40% in 2007, Iuliano found.
“People who apply for discharge have a very high probability of winning,” Iuliano told CNBC. His study used a final dataset of 652 bankruptcy discharge cases from October 2022 to November 2023 that included student loans.
The improvement in bankruptcy status for student loan borrowers is largely due to updated bankruptcy guidelines issued by the Biden administration. In November 2022, the U.S. Department of Education and Department of Justice announced that experts would treat student loans like any other type of debt in bankruptcy courts. Borrowers can fill out a 15-page certification form detailing their financial hardship and claiming a mulligan.
The Trump administration has not rescinded this guidance. A Department of Education spokesperson told CNBC that the department has no plans to change this approach at this time.
According to government data, more than 42 million Americans have student loans, totaling more than $1.6 trillion in outstanding debt.
For some people, making the process easier will “change their lives”
Amid concerns that young people would try to avoid financial obligations, policymakers began passing laws in the mid-1970s that raised the standards for student loan repayment in court.
Government lawyers fought the case, which required some people to prove “certain despair” and “undue hardship.”
Virginia bankruptcy attorney Marissa Giles said the easier bankruptcy process has been “life-changing” for her clients, many of whom have had student loans for decades.
“It allows them to sleep at night,” she says.
In the cases investigated by Iuliano, 73% of student loan bankruptcy filers were women. The average student loan balance for applicants was $115,000, but 10% of borrowers had more than $240,000 in debt. The debtors’ ages ranged from 24 to 76 years.
It’s a myth that student loans can’t be forgiven
Although the odds of bankruptcy for student loan borrowers have gradually improved, many still don’t bother filing the additional lawsuits, known as adversary proceedings, needed to repay student loans, Iuliano found.
More than 3 million student loan borrowers filed for bankruptcy from 2011 to 2024. However, only 7,293 of them took the additional step of applying for student loan forgiveness, he wrote in his research paper.
“Many lawyers don’t even bring up that possibility with their clients because there’s a widespread myth that student loans can never be discharged in bankruptcy,” Iuliano told CNBC.
“However, the new certification process is so streamlined that bankruptcy attorneys should recommend it to all clients with student loans.”
Bankruptcy could be the ‘only realistic way out’
Simplifying the bankruptcy process could provide a lifeline for many Americans struggling with education debt.
Student loan holders are under pressure from a weakening labor market, continued changes to lending policies, and more recently, difficulty accessing relief programs such as debt forgiveness and affordable repayment plans. More than 5 million student loan borrowers are currently in default, and that total could soon rise to about 10 million, the Department of Education announced earlier this year.
A Department of Education spokesperson recently confirmed to CNBC that the Trump administration will begin garnishing paychecks for student loan defaulters starting in early January.
“For many people, interest and fees have resulted in balances that are impossible to repay, and bankruptcy is the only practical solution,” Iuliano said.
