WASHINGTON - A new report published in the American Bankruptcy Law Journal suggests that struggling borrowers may have more success discharging their student loans than previously thought. The study, titled "Bridging the Student Loan Bankruptcy Gap," analyzes the impact of federal reforms introduced in late 2022 designed to make the process easier and more consistent for those facing financial distress.

For millions of Americans, the return to student loan repayment has strained monthly budgets. This financial pressure intensified this week as the federal government resumed aggressive collection efforts for the first time since the COVID-19 pandemic began.

According to the U.S. Department of Education, administrative wage garnishment for borrowers with defaulted loans resumed on Wednesday. This allows the government to order employers to withhold up to 15 percent of a borrower's disposable pay to repay defaulted federal student loans. The department also confirmed that the Treasury Offset Program, which allows the government to seize tax refunds and Social Security benefits to pay off student debt, resumed in May 2025.

Borrowers also face new tax liabilities this year. The Internal Revenue Service confirmed that a temporary provision from the American Rescue Plan Act, which made student loan forgiveness tax-free, expired on January 1. As of New Year’s Day, any student debt cancelled by the government is once again considered taxable income, potentially leaving borrowers with significant tax bills.

Despite these renewed financial threats, many borrowers operate under the assumption that student loans cannot be eliminated through bankruptcy. This belief is so widespread that researchers refer to it as the "Student Loan Bankruptcy Gap," a term that describes the discrepancy between the number of people who could legally qualify for debt relief and the small number who actually apply for it.

The report indicates that for every 500 student loan borrowers who file for bankruptcy, 499 never attempt to discharge their educational debt. This reluctance often stems from a long-standing "myth of nondischargeability," which suggests that a borrower must be destitute or severely incapacitated to qualify for relief. However, data collected from the first year of the new federal guidance reveals that 87 percent of borrowers who filed the necessary paperwork to challenge their loans achieved a successful outcome.

To eliminate student debt in bankruptcy, a borrower must prove that repaying the loan would cause "undue hardship." This legal standard typically requires filing a separate lawsuit within the bankruptcy case, known as an adversary proceeding. An adversary proceeding is essentially a civil trial in which the borrower is the plaintiff and the student loan lender is the defendant. In the past, the Department of Justice often vigorously opposed these suits, making the process expensive and intimidating for debtors.

In November 2022, the Department of Justice and the Department of Education issued new guidance to streamline this process. The centerpiece of this reform is a new "attestation form." This standardized document allows borrowers to provide details about their finances to prove they meet the three requirements of the "Brunner test," the legal standard used by most courts to determine undue hardship.

The Brunner test requires borrowers to demonstrate three things. First, they must show they cannot maintain a minimal standard of living for themselves and their dependents if forced to repay the loan. Second, they must show that their financial situation is likely to persist for a significant part of the repayment period. Third, they must show they have made a good-faith effort to repay the loans in the past.

The new attestation form clarifies these requirements. For example, the guidance suggests that a borrower meets the "future inability to pay" requirement if they are age 65 or older, have a disability, have been unemployed for five of the last ten years, or did not obtain the degree for which the loan was taken. The report found that success rates were consistent regardless of which specific arguments a debtor used, suggesting that the government is taking a more holistic approach to settlements.

The study found that of the cases analyzed, 86 percent were resolved through settlements rather than lengthy trials. These settlements often resulted in significant relief. On average, successful borrowers discharged approximately $85,000 of educational debt. In many cases, the government agreed to a full discharge, but partial discharges were also common, allowing borrowers to eliminate a portion of their debt even if they could afford to pay some of it.

Despite these favorable outcomes, the total number of filings remains low. In the first full year following the reforms, only about 600 adversary proceedings were filed, a small fraction of the estimated 37,000 borrowers in bankruptcy who likely met the standard for relief. The report suggests this low filing rate is partly due to the high cost of legal representation. Attorneys often charge high fees for these cases because they perceive them as difficult and time-consuming, though the data shows the average case duration has dropped to about nine months.

Legal representation does appear to make a difference. The study found that borrowers represented by an attorney had a 91 percent success rate, compared to 61 percent for those who represented themselves. However, the report notes that many self-represented borrowers lost their cases simply because they failed to follow through with procedural steps, not because their claims lacked merit.

The demographics of those filing for relief paint a picture of genuine financial struggle. The average filer in the study was a 47-year-old woman owing $115,000 in student loans. Most had a negative net worth and were insolvent at the time of filing.

The report concludes that while the new system is working well for the few who use it, most eligible borrowers are missing out on a fresh start. The "gap" remains wide, not because the law is impossible to satisfy, but because few people attempt to use it.