Growing Number of Students Find Relief as Bankruptcy Discharges Student Loan Debt

A significant number of student loan borrowers who were struggling financially have been able to discharge their debts through bankruptcy, thanks to new rules implemented by the Biden administration. According to the Department of Education, in the first 10 months since the new bankruptcy process was created in November of last year, 99% of borrowers using it had at least some of their student loan debt discharged. While only 632 individuals have utilized the new process so far, officials expect this number to increase significantly as more lawyers become trained on the new guidelines.

Unlike other types of debt, student loan debt is treated differently in bankruptcy courts due to legislation passed in the 1970s. This legislation was enacted out of concern that highly educated and wealthy professionals would take advantage of the system. As a result, debtors seeking to have their student loans discharged must go through the additional step of suing the government to prove that their loans cause “undue hardship.”

Proving this “undue hardship” has historically been a costly and difficult process, with only a small fraction of individuals with student loans who declared bankruptcy successfully discharging their debts. However, a new procedure implemented by the Justice Department last November has standardized and simplified the process. Debtors can now apply to have their student debt discharged by filling out a 15-page form, and government attorneys use new guidelines to assess whether the debtor qualifies for “undue hardship.”

Rich Cordray, the chief operating officer of the Office of Federal Student Aid, stated that the improved process is clearly helping struggling borrowers. Cordray expressed a commitment to continuing to streamline this process in partnership with the Justice Department to provide student loan borrowers with much-needed relief in bankruptcy.

While bankruptcy is not a perfect solution for financial difficulties, it can provide a fresh start for individuals with no better options. It is important to note that bankruptcy proceedings can result in the loss of property and severely impact credit scores for several years. However, the ability to discharge student loan debt through bankruptcy is now a realistic possibility, thanks to these recent reforms.

These changes to the federal financial aid system, including the reforms to bankruptcy, were introduced last year to ease the financial burden on borrowers as the pandemic-era pause on interest and required payments came to an end in October.