MOHELA Student Loan Bankruptcy: What You Should Know

Student loan debt in the United States has reached crisis levels, with millions of borrowers struggling under the weight of their financial obligations. For those with loans serviced by MOHELA (the Missouri Higher Education Loan Authority), the question of whether bankruptcy can provide relief is more pressing than ever. While student loans have historically been difficult to discharge in bankruptcy, recent legal developments and policy shifts suggest that change may be on the horizon.

Understanding MOHELA and Its Role in Student Loans

MOHELA is one of the largest federal student loan servicers in the U.S., managing millions of accounts under contracts with the Department of Education. Unlike private lenders, MOHELA primarily handles federal student loans, including Direct Loans, Parent PLUS Loans, and loans from the now-defunct Federal Family Education Loan (FFEL) Program.

Why MOHELA Borrowers Face Unique Challenges

MOHELA has faced criticism for its handling of borrower accounts, particularly during the pandemic-era payment pause. Many borrowers reported issues with misapplied payments, incorrect billing statements, and poor customer service. These administrative failures have left some borrowers in financial distress, making bankruptcy a potential consideration.

The Complex Reality of Student Loan Bankruptcy

For decades, discharging student loans in bankruptcy was nearly impossible due to stringent legal standards. Borrowers had to prove "undue hardship," a vague and difficult standard to meet. However, recent court rulings and policy changes suggest a shift in how bankruptcy courts view student loan debt.

The "Undue Hardship" Standard

Under U.S. bankruptcy law (specifically, Section 523(a)(8) of the Bankruptcy Code), federal and private student loans are generally non-dischargeable unless the borrower can demonstrate that repayment would impose an "undue hardship." Courts have historically interpreted this standard narrowly, often requiring borrowers to prove:

1. Inability to Maintain a Minimal Standard of Living – The borrower cannot afford basic necessities while repaying the loan.
2. Persistence of Financial Hardship – The financial struggle is likely to continue for a significant portion of the repayment period.
3. Good-Faith Effort to Repay – The borrower must show they made genuine attempts to repay before filing for bankruptcy.

Recent Legal Developments

In recent years, some bankruptcy courts have taken a more borrower-friendly approach. A notable 2022 decision (Homaidan v. Sallie Mae) ruled that certain private student loans could be discharged if they did not meet the strict definition of an "educational benefit" under bankruptcy law. Additionally, the Department of Justice (DOJ) and the Department of Education have issued new guidance making it easier for borrowers to argue undue hardship.

Steps to Discharging MOHELA Loans in Bankruptcy

If you're considering bankruptcy as a way to address your MOHELA student loans, here’s what you need to know:

1. Determine Whether Your Loans Are Federal or Private

• Federal loans (serviced by MOHELA) are subject to different rules than private loans.
• FFEL Program loans may have unique dischargeability considerations.

2. File an Adversary Proceeding

• Unlike other debts, student loans require a separate lawsuit within the bankruptcy case.
• You must file a complaint in bankruptcy court to initiate the undue hardship argument.

3. Gather Strong Evidence of Hardship

• Medical records, unemployment documentation, and proof of long-term financial struggles can bolster your case.
• A detailed budget showing inability to repay is crucial.

4. Consider Alternative Relief First

• Bankruptcy should be a last resort. Explore income-driven repayment (IDR) plans, loan forgiveness programs, or temporary forbearance.

The Future of Student Loan Bankruptcy Reform

Advocates have long pushed for changes to make student loan discharge easier. Recent developments suggest policymakers are listening:

• The Biden Administration’s Bankruptcy Policy Shift – The DOJ now uses a more lenient framework for evaluating undue hardship claims.
• Legislative Proposals – Bills like the Student Loan Bankruptcy Fairness Act aim to remove the undue hardship requirement entirely.

While full reform has yet to pass, the legal landscape is evolving. Borrowers with MOHELA loans—and student debt in general—should stay informed about their rights and options.

Final Thoughts for Struggling Borrowers

If MOHELA’s servicing errors or overwhelming debt have left you considering bankruptcy, consult a qualified attorney specializing in student loan and bankruptcy law. The process is complex, but with the right strategy, relief may be possible.

For now, the best course of action is to stay updated on policy changes, explore all repayment options, and seek legal advice before making any major financial decisions. The fight for fairer student loan bankruptcy laws continues—and for many, it can’t come soon enough.