Student Loan Revamp Leaves Bankruptcy Untouched
Reprinted with permission from Law360, published Aug. 12, 2026, in the Expert Analysis series. All rights reserved. Further duplication without permission is prohibited. Contact Law360 Rights and Reprints.
As of July 1, new borrowers generally may no longer utilize Graduate PLUS loans to finance the full cost of attendance.
With this provision of the One Big Beautiful Bill Act, Congress fundamentally reshaped the federal student loan system, enacting the most significant changes to federal higher-education financing in decades.[1] While the legislation has attracted considerable attention within higher education, its implications extend well beyond university campuses.
Bankruptcy practitioners, in particular, should understand how these reforms may reshape future consumer insolvency. For higher education institutions, these reforms represent a significant shift in federal funding policy. For bankruptcy practitioners, however, the more pressing question is whether these reforms will reduce financial distress or merely shift it into a bankruptcy system whose treatment of educational debt remains largely unchanged.
As bankruptcy practitioners know, educational debt remains among the few categories of unsecured debt that generally survives bankruptcy.
Although Congress has fundamentally restructured how future borrowers obtain and repay federal student loans, it has left the Bankruptcy Code’s treatment of educational debt largely unchanged. The result is a lending system designed to curb excessive borrowing without expanding relief for borrowers who nevertheless experience financial catastrophe.
A Fundamental Shift in Federal Lending
For nearly 20 years, graduate students had access to the Graduate PLUS Loan program, allowing them to finance educational expenses up to the school’s certified cost of attendance.
With the Graduate PLUS change on July 1, graduate and professional students are subject to annual and lifetime borrowing caps, with higher limits reserved for designated professional degree programs. Parent PLUS borrowing is likewise subject to new annual and aggregate borrowing limits.
The legislation also simplifies federal repayment options. Rather than navigating numerous income-driven repayment plans, new borrowers generally will have only two repayment choices: a standard repayment plan or the newly created Repayment Assistance Plan. Existing borrowers retain certain legacy options during a transition period, but those options will eventually be phased out.
The stated policy objectives are understandable: reduce taxpayer exposure, simplify repayment, discourage excessive borrowing, and create greater accountability within higher education. Whether those objectives ultimately reduce consumer insolvency remains an open question.
These reforms fundamentally reshape how future educational debt will be incurred and repaid. They do not, however, materially alter what happens when repayment ultimately becomes impossible.
The Bankruptcy Disconnect
From the perspective of bankruptcy law, the reforms address only one side of the equation. Congress has attempted to moderate the growth of educational debt without materially changing the consequences when repayment becomes impossible.
Section 523(a)(8) of the Bankruptcy Code continues to except most educational loans from discharge absent a showing of “undue hardship.”
Although the U.S. Department of Justice and the U.S. Department of Education adopted guidance in 2022 encouraging government attorneys to stipulate discharge in appropriate undue hardship cases, that guidance neither amended Section 523(a)(8) nor altered the governing legal standards applied by bankruptcy courts.
In most jurisdictions, bankruptcy courts continue to apply the test derived from the U.S. Court of Appeals for the Second Circuit’s 1987 decision in Brunner v. New York State Higher Educational Services Corp., or comparable circuit precedent when determining whether repayment would impose an undue hardship.[2]
Relief therefore remains dependent upon individualized litigation or negotiated resolution rather than any statutory right to discharge.[3] The result is a striking policy disconnect: Federal lending has been comprehensively restructured, while the Bankruptcy Code’s treatment of educational debt remains largely unchanged.
Borrowing Caps May Prevent Future Distress
To be sure, several aspects of the legislation deserve praise.
Unlimited federal lending has long drawn criticism from economists and insolvency professionals alike. When federal financing is effectively unlimited, institutions face diminished market pressure to constrain tuition growth, while borrowers have fewer incentives to evaluate long-term repayment risk. Graduate tuition has increased dramatically over the past two decades while average student indebtedness has followed a similar trajectory.
Borrowing limits may restore some measure of financial discipline. Law schools, business schools, medical schools and universities generally may face increased pressure to justify tuition increases or expand institutional aid if federal financing becomes less readily available. Likewise, prospective students may more carefully evaluate expected return on investment before assuming six-figure educational debt.
From a bankruptcy standpoint, preventing excessive debt accumulation is unquestionably preferable to attempting to resolve overwhelming debt after financial collapse. The best bankruptcy case is often the one that never needs to be filed.
Reduced Flexibility, Increased Financial Risk
The legislation’s changes to repayment deserve closer scrutiny. Historically, income-driven repayment plans have provided relief that bankruptcy often cannot. By adjusting payment obligations to income, these programs allowed borrowers experiencing temporary unemployment, illness, caregiving responsibilities or reduced earnings to avoid default without satisfying the demanding “undue hardship” standard required for discharge.
Simplification undoubtedly reduces administrative complexity. However, simplification should not come at the expense of flexibility. For many borrowers, especially those entering public service or lower-paying professions, fewer repayment alternatives may ultimately produce higher default rates.
Because student loans generally remain nondischargeable, defaulted borrowers often enter bankruptcy only to discover that their largest financial obligation survives the proceeding. In that respect, repayment programs have increasingly become the federal government’s principal insolvency mechanism for educational debt. Narrowing those programs necessarily places greater pressure on the bankruptcy system, even though bankruptcy itself offers comparatively little relief.
Unique Challenges of Professional Education
The reforms may prove especially consequential for graduate and professional education, where tuition frequently exceeds the new federal borrowing limits and students have historically relied upon Graduate PLUS financing to bridge the gap. Bankruptcy practitioners routinely encounter professionals whose projected earning capacity at graduation ultimately bears little resemblance to the financial realities they later experience.
Many law graduates ultimately enjoy successful careers. Others do not. Economic recessions, health issues, failed business ventures, caregiving responsibilities or geographic limitations frequently alter professional trajectories in ways impossible to predict when educational loans are first incurred. The same holds true for physicians, dentists, pharmacists, veterinarians, architects and countless other professionals.
Federal borrowing caps may reduce excessive indebtedness for future graduates. Yet they may also increase reliance on private educational loans, institutional financing or alternative credit products that frequently carry higher interest rates, fewer borrower protections and less flexible repayment options.
Ironically, shifting borrowers from federal to private lending may simply relocate insolvency risk rather than eliminate it. Unlike federal loans, private educational financing generally lacks income-driven repayment options and other administrative relief mechanisms, making financial distress more likely to manifest in bankruptcy proceedings.
Implications for Bankruptcy Practice
For bankruptcy practitioners, these developments warrant close attention. Trustees, debtor’s counsel and creditors alike will increasingly encounter borrowers whose educational debt reflects two distinct regulatory frameworks: legacy federal loans governed by pre-2026 repayment programs and newer loans subject to significantly different borrowing limits and repayment options.
Consumer practitioners should anticipate more complex analyses involving repayment plan eligibility, loan consolidation, administrative remedies and the continuing viability of undue hardship litigation under Title 11 of the U.S. Code, Section 523(a)(8). Chapter 13 practitioners may likewise face evolving feasibility issues as debtors attempt to balance plan payments with postpetition obligations arising under the new repayment framework.
Practitioners should also consider how Repayment Assistance Plan obligations and private educational loan payments may affect disposable income calculations, plan confirmation and postdischarge financial rehabilitation.
The reforms may also reshape the broader consumer credit landscape. As federal borrowing becomes more constrained, graduate and professional students may increasingly rely on private educational financing to bridge funding gaps. That shift presents important bankruptcy considerations.
Although many private educational loans are excepted from discharge under Section 523(a)(8), others, particularly certain direct-to-consumer loans that do not qualify as “qualified education loans” within the meaning of the Internal Revenue Code, may fall outside the scope of Section 523(a)(8) and therefore be dischargeable without a showing of undue hardship.
As borrowing patterns evolve, practitioners should carefully analyze each educational obligation individually rather than assume all student debt receives identical treatment under Section 523(a)(8).
Looking Ahead
The recent reforms represent the most significant restructuring of federal student lending in decades. They may successfully moderate borrowing, encourage institutions to reconsider tuition pricing and simplify repayment. Yet they leave unresolved the question bankruptcy practitioners confront every day: What relief exists for the honest but unfortunate borrower whose financial circumstances render repayment impossible?
Lending reform may reduce future overborrowing, but it cannot substitute for a Bankruptcy Code capable of providing meaningful relief when financial failure nevertheless occurs. Until Congress reexamines the interaction between federal student lending and Section 523(a)(8), bankruptcy will remain an incomplete safety net for one of the nation’s largest categories of consumer debt.
[1] One Big Beautiful Bill Act, Pub. L. No. 119-21 (2025).
[2] Brunner v. N.Y. State Higher Educ. Servs. Corp. , 831 F.2d 395 (2d Cir. 1987); see also Educational Credit Mgmt. Corp. v. Faish , 72 F.3d 298 (3d Cir. 1995) (adopting Brunner in the Third Circuit).
[3] U.S. Department of Justice & U.S. Department of Education, Guidance for Department Attorneys Regarding Student Loan Bankruptcy Litigation (Nov. 17, 2022).
