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Are Student Loan Bankruptcies on the Horizon?

By George Khoury, Esq. on June 20, 2018 | Last updated on March 21, 2019

One of the not-so-new hallmarks of a legal education is the prohibitive cost. And while there are student loans available to most law students, the risk of taking on massive student loan debt when the legal job market isn't that strong is not insignificant.

It is generally accepted that student loan debt cannot be discharged through bankruptcy, or at least that it is next to impossible. And that still may be the case, but some bankruptcy court judges are, as the ABA Journal explains, getting creative and finding some "wiggle room" to get student borrowers some relief. For future student loan debtors that get some relief, you may have the judge's heavily indebted law clerk(s), or even the judge's debt-saddled child, to thank.

Interested Judges

One of the ways judges are providing relief to student loan borrowers seeking bankruptcy is by squashing accrued interest. In late 2016, one judge chopped off nearly $150k worth of interest from a couple's student loan debt. Unfortunately, in the few recent cases where the bankruptcy judges found "undue hardship" and cancelled the student loan debts entirely, appellate courts reversed and remanded.

Interested D.O.E.

In addition to several bankruptcy court judges being interested in helping student loan debtors find some relief, the Department of Education seems to be trying too. In February of this year, a call was put out for input from lenders, institutions, individuals and the public. Central to the problem, which the D.O.E. explains in their call, is that the requirement for discharging student loan debt, that the borrow experience "undue hardship" has never been defined.

Don't Bank on It

Though there may be some potential for bankruptcy relief from unmanageable student loan debt on the horizon, it'd be wise for indebted grads to do their best to work with their lenders to avoid default. Potential options include deferments, income based repayment plans, and other refinancing options.

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