Big changes to student loan bankruptcy rules may be coming – but questions remain

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It may soon become easier for some borrowers to pay off their student loan debt by going bankrupt. But many questions remain as to what these changes might look like and how drastic the reforms will ultimately be.

Student loans and bankruptcy: how it works now

While it is far from impossible to write off student loan debt through bankruptcy under current law, it is not easy. To be successful, most student loan borrowers must prove that they are in “undue hardship,” which is a difficult legal standard. The bankruptcy code does not define in detail what it really means to have undue hardship, so bankruptcy courts have had to step in to create rules and tests (and not all jurisdictions have adopted the same standard or the same test). In many states, student loan borrowers need to show that there is a “certainty of hopelessness” in their situation.

The process of even trying to prove undue hardship also presents challenges. A student loan borrower seeking to get off their loans in bankruptcy court must initiate “adversarial proceedings” – essentially, they must sue their student loan lenders in bankruptcy court to prove they meet the standard. In most cases, student lenders – including the US Department of Education and the US Department of Justice – will oppose the borrower. Adversarial proceedings can be lengthy, exhausting and, if the borrower engages in private legal counsel, costly, which in itself can reduce the argument of undue hardship. Meanwhile, lenders have much more resources than borrowers, which gives them an advantage in court. As a result, many borrowers don’t even bother to try and get their student loan discharge in bankruptcy.

Possible new changes to student loan bankruptcy rules by Biden administration

At a House Education and Work Committee hearing earlier this week, Federal Student Aid Executive Director Richard Cordray told members of Congress that the current treatment by the Department of Education federal student loan bankruptcy cases are untenable. “The process is not working well,” he said. “It needs to be reformed… and we are committed to doing it.”

Cordray said the Biden administration is actively exploring ways to change the way the Education Department deals with undue hardship cases for federal student loan borrowers seeking discharge from bankruptcy. Although he provided few details, advocates suggested various parameters the Ministry could use to support (rather than oppose) a borrower’s claim for undue hardship, such as a constant state of poverty over the course of time. many years, or resorting to income from public assistance benefits such as Social Security. If the Department of Education stops opposing at least some borrowers trying to get undue hardship bankruptcy discharges, that would represent a huge change and could open the doors for many more borrowers seeking relief. .

Cordray said the administration would release more information on his position “fairly soon.”

Student Loan Bankruptcy Law Reform

While a change in the Department of Education’s handling of undue hardship bankruptcy cases for federal student loan borrowers would be significant, it would take an act of Congress to fundamentally and permanently change the bankruptcy code.

In August, a bipartisan group of senators unveiled the Fresh Start Through Bankruptcy Act. The bill, sponsored by Sen. Richard Durbin (D-IL) and Sen. John Cornyn (R-TX), would amend the bankruptcy code to make it easier to allow the discharge of federal student loans in the event of bankruptcy.

Specifically, the bill would eliminate the undue hardship standard for federal student loan borrowers who have been repaying their loans for at least 10 years, allowing those borrowers to eliminate their federal student loan debt as easily as any other type of loan. releasable consumer. debt. No adversarial procedure would be necessary. The 10-year waiting period would be similar to previous legal standards for bankruptcy for student loans decades ago, before Congress passed legislation establishing the undue hardship standard. Such waiting periods were designed to prevent fraud (for example, when borrowers try to pay off student loans right after graduation).

While the Fresh Start Through Bankruptcy Act enjoys bipartisan support, its fate is currently uncertain as Congress now focuses on other pressing issues, including the adoption of President Biden’s signature infrastructure and plans. social spending law.

Private student loan borrowers excluded from bankruptcy reforms

It is important to note that the administrative measures envisaged by the Department of Education and the reforms contained in the Fresh Start Through Bankruptcy Act would only affect federal borrowers of student loans. The onerous undue hardship standard would remain in place for private student loan borrowers – unless Congress passes legislation that covers private student loans. Private student loan borrowers have also been excluded from other recent student loan relief, including billions of dollars in student loan cancellations recently enacted by the Biden administration.

Further reading

The winners and losers of Biden’s student loan forgiveness initiatives

4 signs Biden may not cancel large-scale student loan debt

Biden to transform civil service loan forgiveness with huge changes: key details

Student Loan Forgiveness Changes: Who Qualifies and How to Apply for Biden’s Relief Extension


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