An Empirical Assessment of Student Loan Discharges and the Undue Hardship Standard

Abstract

For years, academics have argued that the undue hardship standard for discharging student loans in bankruptcy is both unduly burdensome and applied in an inconsistent manner. By reviewing a nationwide sample of student loan bankruptcy disputes, this study shows that neither criticism is warranted. First, judges grant a hardship discharge to nearly forty percent of the debtors who seek one. Second, successful debtors differ from their unsuccessful counterparts in three important respects. They are (1) less likely to be employed, (2) more likely to have a medical hardship, and (3) more likely to have lower annual incomes the year before they filed for bankruptcy.

The real failing of the student loan discharge process is lack of participation by those in need. Incredibly, only 0.1 percent of student loan debtors who have filed for bankruptcy attempt to discharge their student loans. That statistic is even more surprising in light of this Article’s finding that a debtor does not need to hire an attorney to be successful. In fact, debtors without attorneys were just as likely to receive discharges as debtors with attorneys were. Ultimately, the low rate of filing shows that, although the system is broken, many of its flaws stem from a failing not previously discussed in the literature.

Keywords: Bankruptcy, Student Loans, Discharge, Undue Hardship

JEL Classification: H52, H81, I22