- Because of a Biden administration policy change announced last November, more people with federal student loans were able to discharge their debts in bankruptcy court.
- In the first 10 months of the new policy, student loan borrowers filed more than 630 bankruptcies, a “significant increase” compared to recent years, the government said.
President Joe Biden delivers a speech on the student loan forgiveness program on October 17, 2022.
Leah Millis | Portal
Because of a Biden administration policy change announced last November, more people with federal student loans were able to discharge their debts in bankruptcy court.
In fall 2022, the U.S. Department of Education and the U.S. Department of Justice released updated bankruptcy guidelines to make it easier for struggling borrowers to have their student loans discharged through court. Until now, it has been difficult, if not impossible, for people to get relief from their education debts through a normal bankruptcy process.
“I am pleased that our year-long review shows that our efforts have made a real difference in the lives of borrowers,” Assistant Attorney General Vanita Gupta said in a statement Thursday.
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In the first 10 months of the new policy, student loan borrowers filed more than 630 bankruptcy cases, a “significant increase” compared to recent years, the departments said.
“The vast majority of borrowers seeking relief have received full or partial relief,” they said.
Outstanding student debt in the U.S. is over $1.7 trillion, and about 7% of student loan borrowers have balances greater than $100,000. Even before the Covid-19 pandemic, around 10 million borrowers were in default or in default.
Student loans have long been treated differently in bankruptcy courts than other types of debt, drawing criticism from legal experts and consumer advocates.
Back in 2018, Federal Reserve Chairman Jerome Powell said he “couldn’t explain” why student loans couldn’t be paid off in bankruptcy. Powell also warned that rising debt could slow economic growth over time.
The difficulty of paying off student loans in bankruptcy dates back to the 1970s, when lawmakers introduced a requirement that student loan borrowers wait at least five years after beginning repayment before filing for bankruptcy. The move came in response to concerns expressed by policymakers and experts that students would take on a lot of loans and then try to get rid of them after graduation.
These fears are largely exaggerated, said higher education expert Mark Kantrowitz.
“Only borrowers who are in extreme financial difficulty seek debt repayment,” Kantrowitz said. “A bankruptcy discharge ruins your credit score for seven years and prevents you from getting credit cards, car loans and mortgages.”
Nevertheless, the waiting period was increased to seven years in 1990. And the rules changed again nearly a decade later, requiring people with federal or private student loans to prove their debts posed an “undue hardship” in order to discharge them. But Congress has never clarified what the term means, and lawyers and advocates complained that the uncertainty led to injustice in the courts.
“The new policy represents a softening of the hardline stance on federal student loan relief,” Kantrowitz said. He added that the courts were now moving in the direction of “treating student loans like other debt.”