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Student debt has long been considered difficult, if not impossible, to discharge in bankruptcy. But that hasn’t been the case in recent years, a new study finds.
The success rate for student loan borrowers who attempt to discharge their debt in bankruptcy has “jumped” to 87%, according to an analysis published in The American Bankruptcy Law Journal this month by Jason Iuliano, a professor at the University of Utah’s S.J. Quinney College of Law. In 2017, the success rate for education debt holders in bankruptcy was 61%, and in 2007, it was 40%, Iuliano found.
“People who file for discharge are winning at very high rates,” 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 improved outcomes for student loan borrowers in bankruptcy stem, in large part, from updated bankruptcy guidelines the Biden administration issued. In November 2022, the U.S. Department of Education and the Department of Justice rolled out a policy that experts say treats student loans more like other types of debt in bankruptcy court. Borrowers can fill out a 15-page attestation form, detailing their financial struggles and making their case for a mulligan.
The Trump administration has not rescinded that guidance. The Education Department did not respond to a request for comment.
More than 42 million Americans hold student loans, and the outstanding debt exceeds $1.6 trillion, government data shows.
Easier process is ‘life-changing’ for some
Amid concerns that young people would try to avoid their financial obligations, policymakers began passing laws in the mid-1970s that raised the bar for discharging student debt in court.
Government attorneys battled the cases, and some people needed to prove a “certainty of hopelessness” and “undue hardship.”
Malissa Giles, a bankruptcy attorney in Virginia, said the easier bankruptcy process has been “life-changing” for her clients, many of whom have carried their student debt for decades.
“It allows them to sleep at night,” she said.
Women made up 73% of the student loan bankruptcy filers in the cases Iuliano reviewed. The average student loan balance for the filers was $115,000, but 10% of the borrowers owed more than $240,000. The debtors ranged in age from 24 to 76.
Student debt not dischargeable is a ‘myth’
While the odds for student loan borrowers in bankruptcy have slowly improved, many people still don’t bother to file the separate lawsuit required for the discharge of student debt, called an adversary proceeding, Iuliano found.
More than 3 million student loan borrowers filed for bankruptcy between 2011 and 2024. But only 7,293 of those individuals took the additional step of requesting a student loan discharge, he writes in his study.
“The myth that student loans are never dischargeable in bankruptcy is so pervasive that many attorneys never even raise the possibility with their clients,” Iuliano told CNBC.
“However, the new attestation process is so streamlined that bankruptcy attorneys should be recommending it to every client with student loans,” he said.
Bankruptcy can be ‘the only real path out’
The easier bankruptcy process may offer a lifeline to many Americans struggling with education debt.
Student loan holders have been under pressure from a weakening labor market, a barrage of changes to the lending system and recent trouble accessing relief programs, including debt forgiveness and affordable repayment plans. More than 5 million student loan borrowers are currently in default, and that total could swell to roughly 10 million borrowers soon, the Education Department said earlier this year.
The Trump administration will start garnishing the wages of student loan borrowers in default in early January, a spokesperson for the Education Department recently confirmed to CNBC.
“For many people, interest and fees have turned the balance into something they can never repay, so bankruptcy is the only real path out,” Iuliano said.
