The Department of Education is considering changes to how bankruptcy rules treat student loans, a move that could potentially provide relief for millions of student loan borrowers who have little hope of repaying their debt.
Under current law, it’s almost impossible for students to get their federal or private student loans discharged in bankruptcy. When loans are discharged, borrowers are no longer legally required to repay them. A strict standard known as “undue hardship” determines if student loans can be discharged. But this standard can be difficult to meet.
However, on Feb. 21, the Department of Education posted a request for public comment on a proposal to review that standard and issue guidance for setting a broader definition of undue hardship.
This change, coupled with guidelines on how government attorneys respond when students request to discharge their loans in bankruptcy, could allow more borrowers to be released from their obligation to repay student loans.
Unfortunately, even if the Department of Education is able to change the standard, borrowers are still likely to face substantial challenges.
Proposed changes to student loan bankruptcy rules
In its request for public comment, the Department of Education expressed concerns that the undue hardship standard as it’s now applied is discouraging borrowers from filing for bankruptcy.
The undue hardship standard, as determined by the so-called Brunner test, requires students to prove they cannot maintain a minimal standard of living if forced to repay their student debt. They must also show that their financial struggles will persist for a significant portion of the loan repayment period and that they made a good faith effort at repayment.
Most borrowers are simply unable to meet this standard.
“Even if you’re able to convince the judge that your circumstances are bleak, you still have to prove that you tried all of the other options,” explained Robertson Cohen, a bankruptcy lawyer at Cohen & Cohen in Denver. “Very few people can successfully navigate the complicated web that only a government agency could create.”
Laws have tightened considerably in recent years. But as far back as 1976, students have faced difficulty with restrictions on discharging student loans. But laws that make discharge difficult cannot be changed without congressional action.
The Department of Education is proposing to change the factors that are considered when determining whether a student is experiencing undue hardship, as well as the weight given to each factor. It’s also exploring whether additional factors should be added to the equation.
This change is likely to receive broad support from consumer advocates who have criticized the lack of options for struggling student loan borrowers. But opponents argue that making discharge easier could put the viability of student loan programs in jeopardy. Opponents claim recent graduates have few assets, so they could game the system by running up large amounts of debt with no intention to repay.
Cohen is also skeptical on how far the Education Department’s authority extends. “I doubt whether or not they can issue ‘guidelines’ for the judicial branch to better define what a hardship means in bankruptcy,” Cohen said. “That is a basic separation of powers, and the executive branch cannot legislate or interpret the law.”
Still, those who wish to submit their opinion on the issue will have a chance to offer their public comments online or via mail by May 22, 2018.
How would these changes affect borrowers?
First of all, it’s unclear whether the Department of Education will move forward with modifying the undue hardship standard or what changes it would implement. Second, there isn’t a good estimate for how much relief such changes would provide for students.
As Cohen explained, the current problem involves both law and procedure. Borrowers can’t just discharge student loan debt in bankruptcy but instead must sue the government.
“It’s a federal lawsuit, and those aren’t cheap,” Cohen warned. “It’s a Catch-22. Basically, even if you have miraculously met the Brunner elements, you still have to come up with tens of thousands of dollars to pay a lawyer to sue the government.”
Under the Obama administration, the Education Department released guidance in July 2015, recommending loan holders discharge student loans in more cases. Previously, attorneys had been fighting against discharge. And as Cohen explained, ongoing litigation when the Department of Education challenges discharge is expensive.
But while Cohen is hopeful that directives not to defend lawsuits could help student borrowers, he warned that “there’s nothing that the Department of Education can do to alter the procedure without an act of Congress.”
The good news is that the Department of Education’s request for comment could signal a willingness to consider bipartisan reforms to current laws.
Currently, these laws, as the Emory Bankruptcy Developments Journal stated, “effectively placed all students who take out loans to pay for their education at the mercy of a harsh system whose narrow exceptions for discharge force debtors to prove that they face a ‘certainty of hopelessness’ in their future.”
Few borrowers today are able to get their loans discharged. But easing undue hardship standards could mean relief for many. So, if you’re having a hard time making student loan payments, there’s at least a little hope on the horizon.
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.45% APR (with Auto Pay) to 7.49% APR (with Auto Pay). Variable rate loan rates range from 2.14% APR (with Auto Pay) to 6.79% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of September 6, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 09/06/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for SoFi.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.19% effective August 10, 2019.
6 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
7 Important Disclosures for College Ave.
College Ave Disclosures
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
1College Ave Refi Education loans are not currently available to residents of Maine.
2All rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
3$5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees.
4This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
Information advertised valid as of 08/01/2019. Variable interest rates may increase after consummation.
|2.14% – 6.79%1||Undergrad & Graduate|
|2.14% – 7.84%2||Undergrad & Graduate|
|2.43% – 6.65%3||Undergrad & Graduate|
|2.43% – 7.60%4||Undergrad & Graduate|
|2.14% – 8.01%5||Undergrad & Graduate|
|2.06% – 8.93%6||Undergrad & Graduate|
|2.74% – 7.24%7||Undergrad & Graduate|