Student Loan Bankruptcy Reform: Changes to the Law

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Updated on February 20, 2023

The Biden administration has reformed its policy for defending student loan bankruptcy discharge cases, clearing a path for the most vulnerable borrowers to truly get a fresh start. But true change won’t come until Congress amends the Bankruptcy Code.

President Biden’s plan to cancel student debt for millions of borrowers may be on ice until the Supreme Court weighs in, but that hasn’t stopped his administration from continuing to use its time in office to help Americans struggling with their loans. Last week, the Justice Department, in partnership with the Education Department, unveiled a policy change designed to make it easier for federal student loan borrowers to clear their school loans in bankruptcy.

Related: Student Loan Bankruptcy Guidelines

Under the new guidelines, debtors who file a separate lawsuit, known as an adversary proceeding, to discharge their student loans will complete an attestation form documenting their expenses, income, age, and so on. The Justice Department’s attorney will use that information to determine whether those things amount to the debtor having an undue hardship. If so, the attorney will recommend a full or partial discharge, depending on where the bankruptcy case was filed.

This policy change is temporary. The president can’t overhaul the Bankruptcy Code. That job is left to Congress. But his administration can revise its approach, which is what’s been done here. But unless lawmakers reform the bankruptcy system, these favorable guidelines can disappear when Joe Biden leaves the White House.

The change is also limited. It only affects Ed-held student loans, i.e., loans that the U.S. Department of Education owns. Borrowers with commercially-held FFEL, Perkins Loans, or private student loans must still battle the Brunner Test.

President Biden delivering speech.

President Joe Biden will speak about student loan debt relief at Delaware State University on Friday, October 21, 2022.

Will bankruptcy laws change for student loans?

Lawmakers will likely amend the Bankruptcy Code in the next few years to make student loans easier to discharge for deserving borrowers. During the pandemic, Senators Dick Durbin, Democrat of Illinois, and John Cornyn, Republican of Texas, introduced a bipartisan bill that would discharge federal student loans as part of bankruptcy proceedings, but only 10 years after the first payment became due.

Related: Student Loan Forgiveness After 10 Years

Massachusetts Senator Elizabeth Warren, also a Democrat, went a step forward and reintroduced the Consumer Bankruptcy Reform Act, which would eliminate the undue hardship standard and allow all student loan borrowers to get debt relief in bankruptcy.

Similarly, House Judiciary Chair Jerrold Nadler, Democrat of New York, and Rep. David Cicilline, Democrat of Rhode Island, introduced a bill last month that also proposes to amend the section of the Bankruptcy Code that makes student loan debt nondischargeable.

If these laws were passed, thousands of student borrowers with no other way to pay off their debt could turn to the bankruptcy court for help. And they could do so without having to show their good faith efforts to repay their education loans.

Despite bipartisan support, no student loan bankruptcy bill has gained traction. Each bill has stalled in Congress. But I believe an amendment is coming that will simplify the bankruptcy process and make student loans dischargeable like other consumer debts.

Other reforms

The latest decision to offer meaningful bankruptcy relief to Americans overwhelmed with their student debt is one of many steps the Biden administration has taken to help borrowers. In the past two years, the Biden administration has overhauled rules and programs that had blocked them from accessing the relief they were promised. For example, the White House has:

  • Promised to cancel up to $20 thousand in debt for tens of millions of borrowers.

  • Softened the Public Service Loan Forgiveness Program’s rules so that tens of thousands of teachers, nurses, military veterans, and others could get their entire federal loan balance forgiven. Read more about the PSLF Waiver.

  • Wiped out millions of dollars in federal for students who went to fraudulent nonprofit schools.

  • Simplified the process for borrowers who become totally and permanently disabled to have their federal student loans eliminated.

  • Started a one-time waiver that will give borrowers credit towards income-driven repayment plan forgiveness for all student loan payments they’ve made since taking out their loans and for some time spent in deferment and forbearance. Read more about the IDR Waiver.

  • Removed the default status from hundreds of thousands of borrowers’ credit reports and gave them a path to return their loans to good standing. Read more about Operation Fresh Start.

President Biden has also extended the payment pause and freeze on interest rates until next summer.

Bottom Line

Student loan bankruptcy changes are coming. The Biden administration has set the first domino in motion by overhauling its process for reviewing undue hardship cases. Lawmakers from both sides of the aisle are working to make school loans as easily dischargeable as credit card debt and medical bills. We’re likely less than a handful of years from that happening.

UP NEXT: Can You Discharge Student Loans in Bankruptcy?

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