Discharging Private Student Loans: Options and Legal Challenges

Overview

Private student loans differ from federal student loans in protections and discharge paths. While federal loans have specific programs (like income-driven repayment and permanent disability discharge) and clearer rules, private loans are contractual obligations governed by lender terms and state law. That makes discharge options narrower and often more fact-specific.

This article explains the legal routes and practical strategies for seeking discharge of a private student loan, what courts typically require, and the realistic outcomes borrowers can expect. It draws on court standards (including 11 U.S.C. §523(a)(8)), guidance from the Consumer Financial Protection Bureau, and my 15 years advising borrowers on student-loan challenges.

Sources: U.S. Bankruptcy Code (11 U.S.C. §523(a)(8)), CFPB (https://www.consumerfinance.gov), Federal Student Aid (https://studentaid.gov).

Legal routes to discharge private student loans

1. Bankruptcy (adversary proceeding)

• Why it’s difficult: The Bankruptcy Code (11 U.S.C. §523(a)(8)) generally prevents discharge of student loans unless the borrower proves “undue hardship.” Courts require an adversary proceeding — a separate lawsuit filed inside bankruptcy — to request discharge.
• Standards courts use: Most courts apply the Brunner test (showing that: (1) you cannot maintain a minimal standard of living if forced to repay; (2) this state of affairs is likely to persist; and (3) you made good-faith efforts to repay). Some jurisdictions use a “totality of circumstances” test instead. See Brunner v. New York State Higher Ed. Servs. Corp., 831 F.2d 395 (2d Cir. 1987) for the standard used in many circuits.
• What judges look for: recent income and expense documents, employment history, disability or health limitations, efforts to obtain employment or retraining, and whether you tried repayment or modification options. Courts also consider whether the borrower acted in bad faith (e.g., took on debt knowing repayment was impossible).
• Practical timeline and cost: An adversary proceeding can add months and legal fees to a bankruptcy filing. Many debtors need specialized bankruptcy counsel experienced with student-loan litigation.

1. Settlement/Negotiation with the lender

• What it is: Private lenders can sometimes be persuaded to accept a reduced lump-sum or modified payment plan to avoid the cost and uncertainty of collection or litigation.
• How it works: Provide documentation showing hardship (income, expenses, medical bills), make a reasonable lump-sum offer (often 30–60% or less of outstanding principal in negotiation scenarios, though results vary), and insist on a written agreement that fully releases the debt upon payment.
• Important cautions: Never make lump-sum payments without a signed settlement agreement. Settlements may be reported to credit bureaus and could trigger cancellation-of-debt tax issues (see the tax section below).

1. Disability discharge under private contracts

• Private lenders may include permanent disability clauses similar to federal Total and Permanent Disability (TPD) discharge, but criteria vary by lender and often require physician certification, Social Security disability award letters, or long-term medical evidence.
• Action steps: Check your promissory note and the lender’s borrower handbook, then follow the lender’s paperwork process. If denied, request written reasons and appeal with supporting medical documentation.

1. Lender-specific forgiveness or repayment assistance programs

• Some private lenders offer career-based forgiveness, employer partnerships, or hardship programs. These are uncommon and lender-specific, so review the promissory note and the lender’s website or call the hardship unit.

1. Statute of limitations and collection defenses

• The statute of limitations for suing to collect a loan varies by state. A lender suing after the limitations period may be blocked by an affirmative defense, but the debt still exists and can be reported to credit bureaus unless time-barred or settled. Do not voluntarily resume payments if a debt is time-barred without legal advice.

What courts require to prove “undue hardship”

• Typical elements under Brunner or totality tests:
• Current income and reasonable living expenses that show an inability to maintain minimal living standards and pay the loan;
• Evidence that the situation is likely to continue for a significant portion of the repayment period (long-term illness, disability, poor labor market prospects, or caretaking responsibilities);
• Good-faith efforts to repay (applications for deferment, forbearance, refinancing, income-based repayment where applicable, or seeking employment).
• Documentation: recent tax returns, pay stubs, bank statements, medical records, proof of job searches, and correspondence with lenders.

Practical, step-by-step strategy (what I do with clients)

1. Gather documents: promissory note, loan statements, all correspondence, tax returns (2 years), pay stubs, bank statements, and medical records if applicable.
2. Contact your lender: Ask about hardship programs, temporary relief, or internal settlement teams.
3. Explore refinancing only if it lowers monthly cost and you qualify; note refinancing often removes federal protections if you refinance federal loans into private ones. See our guide on refinancing student loans (Refinancing Student Loans: Benefits, Pitfalls, and Next Steps) for details: https://finhelp.io/glossary/refinancing-student-loans-benefits-pitfalls-and-next-steps/.
4. If disability may apply, follow the lender’s certification process and, for federal loans, the U.S. Dept. of Education’s TPD process (https://studentaid.gov/). For private loans, treat the lender’s policy as the controlling requirement.
5. If considering bankruptcy, consult a bankruptcy attorney experienced with student-loan adversary proceedings early to evaluate likelihood under your jurisdiction’s test. See 11 U.S.C. §523(a)(8) and related case law.
6. If a settlement is realistic, make offers in writing, document all calls, get terms in writing, and confirm whether the lender will report the settled balance to credit bureaus and issue a 1099-C for canceled debt.

Tax considerations

• Cancellation-of-debt income: When a lender forgives or settles debt for less than the full amount, the forgiven portion can be treated as taxable income by the IRS. Lenders commonly issue Form 1099-C for canceled debt. Always check the IRS guidance and consult a tax advisor. (IRS: “Cancellation of Debt” and Publication details at www.irs.gov.)
• Possible exceptions and state differences: Certain exceptions (like insolvency) may exclude forgiven debt from taxable income. Federal law changes can affect tax treatment; consult a CPA or tax attorney for 2025-specific guidance.
• Internal resource: See our article on tax implications of forgiven student loan debt for more context: https://finhelp.io/glossary/tax-implications-of-forgiven-student-loans-after-discharge/.

Credit reporting and long-term effects

• Settlements, charge-offs, and collection judgments can remain on credit reports for up to seven years and affect mortgage and auto loan eligibility. Even if a debt is discharged in bankruptcy, Chapter 7 or Chapter 13 filings will appear on your credit report for years.
• If a lender agrees to remove negative reporting as part of a settlement, get the promise in writing.

Who should consider which option

• Severe, long-term disability or terminal illness: Pursue disability discharge avenues first (with medical proof), then consider bankruptcy only if necessary.
• Temporary income loss or short-term hardship: Push for forbearance, hardship assistance, or a structured settlement. Refinancing can bridge short-term hardship for borrowers with stable long-term income.
• Long-term structural inability to repay (multiple failed job searches, long-term care responsibilities): Consult bankruptcy counsel to discuss the chance of proving undue hardship.

Common mistakes to avoid

• Accepting verbal settlement terms — always get it in writing.
• Ignoring a lender’s paperwork or missing deadlines for appeals.
• Refinancing federal loans into private loans without understanding the loss of federal protections.
• Assuming a statute-of-limitations defense eliminates the debt completely — it’s a defense to collection suits, not an automatic erasure.

Practical examples (anonymized)

• “Sarah”: Negotiated a lump-sum settlement for a portion of her private loan after documenting prolonged unemployment and medical expenses. The lender agreed to a reduced payoff when provided bank statements and a hardship letter.
• “Derek”: Filed Chapter 7 and then an adversary proceeding; his petition failed because the court found he could retrain and work in his field. The judge applied the Brunner factors and denied discharge. This outcome shows why jurisdictional differences and strong documentation matter.

When to get professional help

• If you’re considering bankruptcy, hire an attorney with student-loan adversary experience.
• For settlements, a consumer-debt attorney or experienced negotiator can increase your odds and help protect you from predatory settlement firms.
• For tax consequences, consult a CPA familiar with cancellation-of-debt rules.

Quick checklist before you act

• Review your promissory note and loan contract.
• Get current loan payoff balances and request an itemized accounting from the servicer.
• Gather 12–24 months of financial records and medical documentation if relevant.
• Ask the lender about hardship options in writing and document the response.
• Consult an attorney before filing bankruptcy or accepting a major settlement.

Related reading on FinHelp

• For context on how private and federal loans differ, read our guide: “Student Loans: Federal vs Private Options” (https://finhelp.io/glossary/student-loans-federal-vs-private-options/).
• If you’re evaluating refinancing as a strategy, see: “Refinancing Student Loans: Benefits, Pitfalls, and Next Steps” (https://finhelp.io/glossary/refinancing-student-loans-benefits-pitfalls-and-next-steps/).

Professional disclaimer: This article is educational and not legal or tax advice. Rules change and outcomes depend on state law and individual facts. Consult a licensed bankruptcy attorney, tax advisor, or financial counselor for guidance tailored to your situation.

Author note: In my practice I prioritize documented hardship, clear written agreements, and early legal consultation. Borrowers with private student loans often get better results when they prepare documentation first and avoid last-minute panic negotiations.