Discharging Student Loans in Bankruptcy Cases

The short story is you cannot discharge student loans.  The longer story is that it is dischargeable if it would “impose undue hardship.”  Most courts require a strong showing of “undue hardship” before allowing discharge of student loans.  “Undue hardship” is defined as:

(1) That she 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) that 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) that the debtor has made good faith efforts to repay the loans.

Note:  the actual language of the Bankruptcy Code excepts from discharge debts for an “education loan that is a qualified loan, as defined in section 221(d)(1) of the Internal revenue Code of 1986, incurred by a debtor who is an individual.”  Section 221(d)(1) of the Internal Revenue Code (“IRC”) defines a qualified education loan as:  “any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses – (A) which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred …” (Dependent is defined as “qualifying child” or “qualifying relative.”)

Based on the Bankruptcy Code’s incorporation of this definition that limits education loans to those for the benefit of a “spouse” or “dependent,” a strong argument can be made that a debt for a cosigned student loan is only excepted from discharge if the beneficiary of the loan is the “spouse” or “dependent” of the debtor.

Although the Bankruptcy Code and the IRC’s language seems to make it clear that section 523(a)(8)’s exception to discharge applies only to education loans for the benefit of a spouse or dependent, that argument has never been made in a published bankruptcy case anywhere in the country.  Few cases have even addressed the situation in which an individual who is not a parent or spouse co-signs the loan.