Reconsidering Bankruptcy’s Place in Student Debt Relief

In the early 2000’s, James Rosen took out $60,000 in federal student loans to help his two daughters pay for college. Over the next two decades, he worked to pay down the debt. But he also suffered stretches of serious illness and, by 2011, could no longer work. By the time he was 79 years old, Mr. Rosen had made nearly $38,000 in payments, yet interest had pushed his balance even higher than when he started—over $63,000. Living on a fixed income with mounting health needs, repayment had become impossible.

In late 2023, James Rosen and his wife filed for bankruptcy. Soon after, they sought a rare form of relief: discharge of his student loan debt. The Rosens faced an uphill battle. While it is possible to discharge student loan debt in bankruptcy, such discharges are rare. This is because unlike other types of unsecured debt, like credit card or medical debt, educational debt is presumptively non-dischargeable in bankruptcy.¹ Borrowers seeking to rebut that presumption must make a legal showing of “undue hardship,” often under a strict, three-pronged standard drawn from Brunner v. N.Y. State Higher Educ. Servs. Corp., 46 B.R. 752 (S.D.N.Y. 1985)—the “Brunner test.”² In practice, very few succeed. One study found that only 0.1% of bankruptcy filers seeking relief from educational debt actually obtain it.³

The student loan exception to bankruptcy’s promise of a financial fresh start goes back decades. In 1976, amid highly publicized (though anecdotal) reports of graduates quickly erasing their student loans despite embarking on lucrative careers, Congress imposed the first limits on discharging educational debt in bankruptcy.⁴ In the years that followed, restrictions grew tighter.⁵ By the time the Rosens sought discharge in 2024, they faced an exceptionally demanding legal standard in bankruptcy court. As one court put it: “Discharge based on undue hardship is reserved for extreme circumstances where a debtor is living in poverty or near poverty with little possibility of supplemental income.”⁶

As it turned out, the Rosens’ circumstances met the high standard. On March 25, 2025, Judge Rebecca B. Connolly of the U.S. Bankruptcy Court for the Western District of Virginia wiped out Mr. Rosen’s student loan debt.⁷ Applying the Brunner test, Judge Connolly found that: (1) the Rosens could not maintain a minimal standard of living if forced to repay the loan; (2) their financial constraints would persist (and likely worsen, given Mr. Rosen’s age and health issues); and (3) Mr. Rosen had made a good faith effort, over 23 years, to repay the loan. In concluding that repayment of the debt would represent an “undue hardship,” Judge Connolly observed that even under an “income driven repayment” plan, Mr. Rosen’s monthly payment would not cover the interest—the debt would continue grow faster than he could repay it. Put simply, continued payments would be futile, and the court would not require Mr. Rosen and his wife to sacrifice their basic needs to continue their monthly payments.

James Rosen’s success in bankruptcy court makes him an outlier. But his struggle to repay educational debt is all too common. Since 1976—when Congress first restricted access to bankruptcy relief for student borrowers—the cost of higher education has exploded. Adjusted for inflation, college students in 2023 paid roughly 150 percent more than their peers did in the mid-1970s.⁸ And rising costs have fueled rising debt.⁹ Lawmakers in 1976 assumed that college graduates would move into well-paid careers and easily repay their loans. For some, that assumption still holds. But in today’s era of staggering tuition, many borrowers inevitably fall behind. By 2024, one in five reported being delinquent on their student loan payments, with low-income borrowers faring even worse.¹⁰

Recent changes to federal law may make it even harder for borrowers to keep up with their educational debt. The package of legislation known as the “One Big Beautiful Bill” (OBBB) includes a number of provisions that restrict borrower safety nets and reduce flexibility in managing federal student loans. Notably, OBBB phases out economic hardship and unemployment deferments,¹¹ and changes the “discretionary income” formula for income-driven repayment, which will result many borrowers owing higher monthly payments.¹²

Although the student debt crisis has dominated headlines for years,¹³ policy debates usually center on repayment terms or loan forgiveness. The role of bankruptcy courts in providing relief to borrowers struggling under the weight of educational debt has received far less attention. But with the recent passage of OBBB—and the general shift in the political winds on student debt relief—that may change. At a Senate hearing in June, Federal Reserve Chairman Jerome Powell called on Congress to consider revisiting the student loan exception to bankruptcy discharge.¹⁴ “People who borrow to invest in their education, that we do not forgive,” said the Fed Chair. “I ask whether that is wise national policy.”

For now, James Rosen’s victory stands as a rare exception in a system designed to keep student debt out of bankruptcy court. But with sky-high tuition costs, OBBB’s narrowing of repayment options, and policymakers like Chair Powell questioning whether the bankruptcy carve-out is still justified, things might change. Perhaps one day, bankruptcy courts will be able to provide broader relief to those borrowers struggling under the weight of their student debt.

¹11 U.S.C. § 523(a)(8).

² See, e.g., In re Little, 607 B.R. 853, 858 (Bankr. N.D. Tex. 2019) (applying the three-part test for undue hardship announced in Brunner v. N.Y. State Higher Educ. Servs. Corp., 46 B.R. 752, 753 (S.D.N.Y. 1985), aff’d, 831 F.2d 395 (2d Cir. 1987)).

³See Jason Iuliano, The Student Loan Bankruptcy Gap, 70 Duke L.J. 497, 498 (2020).

⁴See, e.g., In re Johnson, 218 B.R. 449, 451–52 (B.A.P. 8th Cir. 1998) (citing legislative history of Educational Amendments of 1976); In re Ford, 22 B.R. 442, 444 (Bankr. W.D.N.Y. 1982) (“The legislative history behind the student loan exception to discharge indicates a Congressional concern for those cases of abuse of the bankruptcy laws by former students whose motivation in seeking relief was primarily to avoid payment of their educational loans.”).

⁵Matthew S. Farina, Schoolbooks and Shackles: The Undue Hardship Standard and Treatment of Student Debt at Bankruptcy, 62 B.C. L. Rev. 1621, 1632–33 (2021).

⁶In re Williams, 296 B.R. 298, 303 (S.D.N.Y. 2003), aff’d, 84 F. App’x 158 (2d Cir. 2004).

⁷See In re Rosen, 668 B.R. 541, 543 (Bankr. W.D. Va. 2025).

⁸U.S. Department of Education, National Center for Education Statistics, Table 330.10, Average Undergraduate Tuition, Fees, Room, and Board Rates Charged for Full-Time Students in Degree-Granting Postsecondary Institutions, by Level and Control of Institution: Selected Academic Years, 1963-64 through 2022-23, in Digest of Education Statistics, (table prepared Dec. 2023), https://nces.ed.gov/programs/digest/d23/tables/dt23_330.10.asp.

⁹Ella Koeze & Karl Russell, The Toll of Student Debt in the U.S., N.Y. Times (Aug. 26, 2022), https://www.nytimes.com/interactive/2022/08/26/your-money/student-loan-forgiveness-debt.html.

¹⁰Board of Governors of the Federal Reserve System, Economic Well-Being of U.S. Households in 2024 at 74 (May 2025), https://www.federalreserve.gov/publications/files/2024-report-economic-well-being-us-households-202505.pdf.

¹¹20 U.S.C. § 1087e(f) (as amended by Pub. L. No. 119-21, § 82002, 139 Stat. 348 (2025)).

¹²20 U.S.C. § 1098e(a)(3) (as amended by Pub. L. No. 119-21, § 82001, 139 Stat. 340, 346 (2025)).

¹³See, e.g., Josh Mitchell, The Student-Loan Problem Is Even Worse Than Official Figures Indicate, Wall Street Journal (Apr. 14, 2015), https://www.wsj.com/articles/BL-REB-31849/

¹⁴Jon Hill, Fed’s Powell Suggests Student Loans Too Hard to Discharge, Law360 (June 25, 2025), https://www.law360.com/bankruptcy-authority/articles/2357506/fed-s-powell-suggests-student-loans-too-hard-to-discharge.