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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