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Student Loan Debt & Undue Hardship: Recent Ruling Could Provide Hope to Student Loan Borrowers


Student loans have become one of the largest financial concerns of our generation, and for good reason. Today, student loan debt exceeds all other types of debt, and has been noted as a substantial barrier to major life milestones, such as buying a home, for millions of young Americans. While efforts have been made to address student loan debt on a large scale, individual debtors still find it difficult to deal the very real problems they face.

Although many people believe that student loan debt is not dischargeable in bankruptcy, the truth is that it can be discharged. Because student loan debt is treated differently in bankruptcy than credit card debt and other types of obligations, there are additional burdens debtors must bear in order to prove that their student loan debt constitutes an “undue hardship.” In many bankruptcy courts, however, the standards for proving an undue hardship are often narrowly applied, which means that discharging student loan debt in bankruptcy has not been very common. With a new decision from a federal bankruptcy court in Iowa, however, debtors saddled with student loan debt may have new hope.

The decision stems from Fern v. Fedloan Servicing, in which the court ruled that a student loan debt of $27,000 was dischargeable because it created an undue hardship, despite the fact that the debtor could have paid $0 a month had they enrolled in a repayment plan. Further, the court determined that the emotional burden of the debt itself was a considerable justification for the undue hardship.

The facts of the case concerned a single mother of three who, not being able to collect on child support payments, supported herself and her children on a roughly $1,500 a month income, government benefits, and additional loans. In addition to expenses associated with providing for her family, she also accumulated student loan debts in an attempt to further her education. She accrued debt through several student loans, including a program she did not complete and an esthetician program she did complete. Although she earned her professional license from the second program, she lacked the resources to maintain the license. Her debt grew to $27,000 and because the loans were in deferment or forbearance, had never made a payment.

Because there is no statutory definition of undue hardship, courts commonly rely on tests to determine a debtor’s ability to maintain a minimum standard of living when forced to repay a loan, whether the circumstances that prevented them from paying a debt are expected to continue, and whether they have made efforts in good faith to repay the debt. In this particular case, the court utilized a less-restrictive test – the “totality of the circumstances” test, which considers:

  • A debtor’s current financial resources, as well as past financial resources and reasonably expected future financial resources;
  • A debtor’s necessary and reasonable living expenses; and
  • Any relevant facts or circumstances inherent to their debt, finances, and case.

The debtor in this case met the first two elements of the test because, although she searched for a higher paying job, was unable to find better employment and because her monthly expenses were reasonable and necessary for her given situation. However, determining the weight of other relevant facts required closer evaluation, especially in light of the Education Department’s argument that she would not have to make month payments – or pay $0 a month – under a repayment plan she was eligible for.

In rejection of this argument, the court cited other “costs” associated with the repayment plan, which although touted a $0 per month payment, also resulted in accrued interest during the repayment period, a potential negative impact on credit, housing, and employment, tax consequences upon cancellation, and – most notably – the emotional cost associated with the debt itself. In its ruling, the court cited that they could not ignore a hardship simply because it is not “reflected on a balance sheet,” and therefore ruled in favor of the debtor.

The decision may provide hope to former students who face incredible consequences associated with their student loan debt that affect more than their finances alone. It also shows that courts may be increasingly more receptive to less restrictive definitions of undue hardship. Still, whether student loan debt constitutes an undue hardship remains a challenging legal issue, and one that continues to be debated throughout the public and legal spheres.

If you have questions regarding student loan debt, our Chicago consumer lawyers at Atlas Consumer Law are available to help you learn more about your rights and options. Contact us today to speak with a member of our team.