Student loan debt remains a significant financial burden for millions of Americans, with over $1.7 trillion in outstanding balances as of mid-2025. While bankruptcy has historically been a challenging path for discharging student loans, recent policy changes have made it more accessible for federal loans. However, it's not a straightforward process, and alternatives exist for addressing defaulted loans without filing for bankruptcy. This post summarizes the key requirements for discharging student loan debt in bankruptcy as of July 2025 and explores other options for managing defaulted loans. Remember, this is for informational purposes only—consult a qualified bankruptcy attorney or certified student loan counselor for personalized advice, as laws and policies can evolve.
Discharging Student Loan Debt in Bankruptcy:
Requirements and ProcessStudent loans are generally nondischargeable in bankruptcy unless repayment would impose an "undue hardship" on the debtor and their dependents, as outlined in 11 U.S.C. § 523(a)(8). This standard applies to both federal and private loans. Proving undue hardship requires filing an adversary proceeding—a separate lawsuit within the bankruptcy case (typically Chapter 7 or Chapter 13). The process involves demonstrating three key factors, often evaluated using the Brunner test or similar standards:
- Present Inability to Pay: You must show that, based on current income and expenses, repaying the loans would prevent maintaining a minimal standard of living. This is assessed using IRS expense standards for necessities like food, housing, transportation, and medical costs. If your expenses equal or exceed income, this prong is typically met.
- Future Inability to Pay: Your financial hardship must be likely to persist for a significant portion of the repayment period. Factors include age (e.g., 65+), chronic illness or disability, long-term unemployment (5+ years in the last 10), lack of a degree, or loans in repayment for 10+ years (excluding in-school periods). Courts presume persistence if these apply, but additional evidence (e.g., medical documentation) strengthens the case.
- Good Faith Efforts: You must prove sincere attempts to repay, such as making payments when possible, contacting servicers for options, enrolling in income-driven repayment (IDR) plans, or minimizing expenses while maximizing income. Non-payment due to hardship doesn't disqualify you if efforts were made.
Special Process for Federal Student Loans
Since November 2022, the U.S. Department of Justice (DOJ) and Department of Education (ED) have streamlined the process for federal loans (e.g., Direct Loans) through updated guidance. Borrowers submit a 15-page attestation form detailing finances, loan history, and hardship factors. The DOJ reviews it and, if undue hardship is met, recommends full or partial discharge to the court—often without opposition.
- Success Rates: From November 2022 to March 2025, 98% of decided cases resulted in full or partial discharge when the government recommended it. Filings increased significantly, with 1,220 cases in the first 17 months.
- Updates in 2025: The attestation form was revised in May 2025 to include more detailed expense categories aligned with IRS standards and presumptions for future hardship (e.g., retirement age or chronic conditions). No major legislative changes occurred by July 2025, but the process remains borrower-friendly for federal loans.
- Steps: File Chapter 7 or 13 bankruptcy, initiate an adversary proceeding, submit the attestation (with supporting docs like tax returns and paystubs), and attend any hearings. Costs include bankruptcy filing fees ($338 for Chapter 7, $313 for Chapter 13) plus attorney fees.
Loan Type | Discharge Standard | Key Process Differences | Success Likelihood (2025 Data) |
|---|---|---|---|
Federal (e.g., Direct) | Undue hardship (3 prongs) | Attestation form; DOJ recommendation often leads to stipulation | High (98% in reviewed cases) |
Private | Undue hardship (3 prongs) | Full litigation; no government support | Low; requires strong evidence |
Note: Discharge may be full, partial, or result in modified terms (e.g., lower interest). Always verify eligibility, as bankruptcy impacts credit for 7-10 years.
Options for Addressing Defaulted Student Loans Outside of Bankruptcy
If bankruptcy isn't suitable, several alternatives can resolve default (typically after 270 days of nonpayment) without court involvement. These focus on federal loans, as private loans vary by lender and often require negotiation or settlement. Collections on defaulted federal loans resumed May 5, 2025, including wage garnishment (up to 15%) and tax refund offsets. The Fresh Start program, which offered a one-time reset for defaulted loans, ended October 2, 2024—no extensions were announced by July 2025.
Key Options for Federal Loans
- Loan Rehabilitation: Make 9 affordable payments (typically 15% of discretionary income or $5 minimum) over 10 months. Benefits: Removes default from credit report, restores eligibility for IDR and forgiveness (e.g., PSLF). Limited to once per loan. Contact your servicer via myeddebt.ed.gov or 1-800-621-3115.
- Loan Consolidation: Combine defaulted loans into a new Direct Consolidation Loan. Requires agreeing to an IDR plan or making 3 voluntary payments first. Benefits: Quick (often 4-6 weeks), qualifies for forgiveness credit under IDR adjustments. Apply at studentaid.gov/loan-consolidation.
- Full Repayment: Pay the entire balance, including collection fees (up to 25%). Rarely feasible but stops all consequences immediately.
- Income-Driven Repayment (IDR) Plans: After rehabilitation or consolidation, enroll in plans like SAVE (payments as low as $0, forgiveness after 10-25 years). Use the Loan Simulator at studentaid.gov/loan-simulator for estimates.
- Forgiveness Programs: Pursue Public Service Loan Forgiveness (PSLF) after 120 qualifying payments or teacher/ borrower defense forgiveness if eligible. Default disqualifies you until resolved.
- Deferment or Forbearance: Temporary pauses (e.g., economic hardship, unemployment) after getting out of default. Interest may accrue.
Option | Timeframe | Credit Impact | Forgiveness Eligibility |
|---|---|---|---|
Rehabilitation | 10 months | Removes default | Yes, full access |
Consolidation | 4-6 weeks | Default remains but stops collections | Yes, with IDR |
IDR Enrollment | After resolution | N/A | Yes, payments count toward forgiveness |
Full Repayment | Immediate | Removes default | N/A |
For private loans in default, options include settlement (lump-sum payoff at a discount), rehabilitation per lender terms, or hardship forbearance. Avoid scams—use free resources like studentaid.gov or nonprofit counselors.
Final Thoughts
Discharging student loans in bankruptcy is viable in 2025, especially for federal loans under the DOJ's guidance, but it requires proving undue hardship and professional help. For defaulted loans, rehabilitation or consolidation offers practical paths forward without bankruptcy's long-term effects. With collections active since May 2025, act promptly to avoid garnishment or offsets. Visit studentaid.gov, justice.gov/ust/student-loan-guidance, or contact the Default Resolution Group (1-800-621-3115) for free assistance. Stay informed—student loan policies continue to shift.