Biden administration makes it easier to discharge student loan debt in bankruptcy
The Department of Justice released new guidance Thursday that aims to make it easier to have federal student loan debt discharged in bankruptcy – a particularly difficult legal process under the previous policy.
Unlike credit card, medical and other consumer debts, student loan borrowers must show that paying off the debt would cause them “undue hardship.”
Removing that legal requirement would require an act of Congress. But the new federal guidance, which was released in close coordination with the Department of Education, is meant to simplify the burdensome process of showing undue hardship and make it easier for government lawyers to recommend to the court that the debt be discharged.
Biden administration officials have previously acknowledged that the student loan bankruptcy rules were flawed, and earlier this year, the Department of Education said it was committed to revising its approach to bankruptcy cases. But until now, government lawyers continued to actively fight borrower relief in federal bankruptcy court.
“Today’s guidance outlines a better, fairer, more transparent process for student loan borrowers in bankruptcy,” said Associate Attorney General Vanita Gupta in a statement.
“It will allow Justice Department attorneys to more easily identify cases in which we can recommend discharge of a borrower’s student loans,” Gupta added.
Thursday’s announcement comes one week after President Joe Biden’s student loan forgiveness program was struck down by a federal district court in Texas. The Department of Justice is appealing the judge’s decision, but for now, the administration is not allowed to cancel any debt under the program, which intended to grant up to $20,000 in student loan relief for millions of borrowers.
Payments on federal student loans are set to resume in January as a yearslong pause is scheduled to end, unless the Biden administration decides to extend that pandemic-related benefit.
Student loan advocates and some lawmakers have long pressured the Department of Education to change its approach toward people seeking to have their student loans discharged in bankruptcy court.
“The new guidance will go a long way towards ensuring the department is working with borrowers, not against them, as they navigate already-difficult circumstances,” said Aaron Ament, president of an advocacy group called the National Student Legal Defense Network, in a statement.
As part of the undue hardship analysis, courts review the borrower’s past, present and future financial circumstances. Under the new guidance, the borrower may be asked to submit income information to the government. The Department of Justice, in consultation with the Department of Education, will then review the information provided and determine whether to recommend that the bankruptcy judge discharge the borrower’s student loan debt.
“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,” said John Rao, staff attorney at the National Consumer Law Center, in a statement.