Advocates Cautiously Optimistic About Administration’s Plan to Improve Student Loan Bankruptcy 

November 17, 2022 — Press Release

Concerns Remain about Consistent and Fair Implementation

WASHINGTON — Today, the U.S. Departments of Education and Justice announced new guidance for when the government should allow a student loan borrower who has filed bankruptcy to be relieved of a federal student loan debt. These guidelines aim to enhance consistency and ensure greater equity in the handling of these cases. Until today, the federal government’s default position was to oppose discharge, with the result that many borrowers, even those eligible for discharge, never sought relief from their student loan burdens, and those who persevered were often unsuccessful. 

“The current undue hardship method of student loan discharge is random, arbitrary and unfair,” said National Consumer Law Center (NCLC) Staff Attorney John Rao. “Even though a borrower is in such desperate financial circumstances as to need to file bankruptcy, the government would typically argue that the borrower is not suffering ‘undue hardship’–a requirement for discharging student loans. This additional barrier to debt relief for student loan borrowers was put in place by Congress and was not the result of careful analysis and thoughtful policy debate. Instead it was based on the false premise that student borrowers were more likely to abuse the bankruptcy system, even compared to other consumers with debts owed to the government. The government’s prior approach of fighting borrowers’ claims of hardship indiscriminately exacerbated the problem.” 

“The new guidance has the potential to provide a meaningful avenue for relief but its effectiveness will depend on how it is implemented by the Departments of Education and Justice,” Rao added.

“For years, federal student loan borrowers in financial distress have sought relief from crushing debt loads through bankruptcy courts, only to be defeated by the Departments’ policies and litigation choices,” said Student Borrower Protection Center (SBPC) Deputy Executive Director Persis Yu. “Borrowers deserve a consistent and predictable pathway towards relief. Relief should not depend on the whim of individual judges and attorneys. Importantly, these guidelines only provide relief to federal loan borrowers and do nothing for the millions of borrowers trapped in unaffordable private student loan debt. This is a great interim step but Congress must act to provide complete bankruptcy reform.”

Background

Unlike medical, credit card, and other consumer debts, federal student loans are only dischargeable in bankruptcy if the debtor makes a heightened showing of “undue hardship.” 

The new guidelines advise Department of Justice attorneys to stipulate to the facts demonstrating that a debt would impose an undue hardship and recommend to the court that a debtor’s student loan be discharged under certain circumstances. The guidance provides a framework for Justice attorneys to apply in evaluating the factors that courts typically consider in determining undue hardship. It creates presumptions for some factors based on the borrower’s circumstances that should avoid unnecessary litigation. It also identifies certain objective criteria that borrowers can show for other factors that should cause Justice attorneys to consent to discharge.

The change comes after years of bankruptcy practitioners, legal scholars, and advocates arguing that the government’s approach to educational debt was unfairly punitive and blocked a vulnerable group of debtors from the promise of a fresh start that the Bankruptcy Code was meant to offer.

Further Reading

• Comments NCLC submitted to ED in 2018 on behalf of its low-income clients regarding student loan bankruptcy: NCLC Comments to ED on Evaluating Undue Hardship Claims in Adversary Actions Seeking Student Loan Discharge in Bankruptcy Proceedings
• An article from leading bankruptcy scholars calling on ED to develop consistent and predictable standards to determine when not to contest a student loan bankruptcy discharge: A No-Contest Discharge for Uncollectible Student Loans

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Since 1969, the nonprofit National Consumer Law Center has worked for consumer justice and economic security for low-income and other disadvantaged people in the United States through its expertise in policy analysis and advocacy, publications, litigation, expert witness services, and training. Follow NCLC on Twitter @NCLC4consumers.

The Student Borrower Protection Center (SBPC) is a nonprofit organization focused on alleviating the burden of student debt for millions of Americans. The SBPC engages in advocacy, policymaking, and litigation strategy to rein in industry abuses, protect borrowers’ rights, and advance economic opportunity for the next generation of students. Follow SBPC on Twitter @theSBPC.