‘Good but Slow Start’ for a New Pathway to Student Loan Discharges

The Biden administration’s effort to make it easier to discharge federal student loans in bankruptcy hasn’t made the process as accessible as some borrower advocates and attorneys had hoped.

“It’s a good but slow start; the Department of Justice needs to do a better job,” said Ed Boltz, managing partner at the Law Offices of John T. Orcutt, P.C, and board member of the National Association of Consumer Bankruptcy Attorneys.

Justice Department data released earlier this month shows that 632 cases were filed in the first 10 months. Of the cases resolved, 99 percent have ended in either a full or partial discharge.

That number could be much higher, Boltz said. He’s filed two cases seeking a student loan discharge, but said he could file hundreds. He’s holding off until there’s more predictability in how the Justice Department and courts will review those requests.

“Their target was to lower those burdens,” he said. “It’s just the administration of it that seems to be the biggest problem at this point. If they could just process more, it would be better.”

The Justice and Education Department announced new guidance a year ago to streamline the process for borrowers who want to discharge their loans in bankruptcy proceedings. Historically, borrowers have found it nearly impossible to have their debts forgiven in bankruptcy because Congress has set a high bar for student loan discharges; advocates and lawmakers have pushed the department to loosen the standards. The guidance didn’t do that, but it gave Justice Department lawyers tasked to review applications for relief more leeway in recommending whether the debt should be discharged.

Justice and Education officials touted the success of those changes in a news release sent earlier this month and said that no further modifications are needed. But advocates and bankruptcy attorneys say the process is still burdensome and uncertain for borrowers, and they want the departments to put measures in place to move cases through the process more quickly and consistently.

Boltz said there’s currently too much variability in how the Justice Department’s assistant U.S. attorneys treat the cases. Some will agree to discharge a borrower’s loans within 60 days, while others want to move forward with discovery and depose the individual seeking relief. Boltz can’t tell clients what issues the federal attorneys might raise, how long the process will take or how likely they are to succeed.

“It’s just really a shot in the dark,” he said.

As part of the process, borrowers have to fill out an attestation form provided by the Justice Department that lists their income and expenses. For some of the U.S. attorneys, Boltz said, that form is enough. The Justice Department’s news release didn’t say how many cases have been resolved so far. Boltz said he got a number from sources at the department and that about 138 of the 632 cases have resulted in discharges.

“But they’ve so far only gotten through a quarter of these,” he said. “… They either need to put more people on these or they need to instruct the people who are working on this that they need to work faster and get these done, which means working faster and not digging in as deep.”

Data obtained in August by the National Student Defense Legal Network, a nonprofit that has represented borrowers in bankruptcy proceedings, showed that fewer than 45 individuals had received either a partial or full discharge since November 2022 by that point.

Borrowers typically have to show during bankruptcy proceedings that they would suffer “undue hardship” if the student loans are not discharged. That’s a higher bar than for other types of debt, which require individuals to show they can’t maintain a minimal standard of living while making loan payments and that their circumstances are unlikely to improve in the future.

A bankruptcy judge makes the final decision on whether that “undue hardship” standard is met, but the guidance outlined a new process and criteria for U.S. attorneys to use in deciding whether to recommend that the student loans should be discharged. Under the criteria, borrowers should be more likely to meet the hardship standard if they didn’t get a degree, are 65 or older, have a disability or chronic injury, or have been unemployed for at least five of the last 10 years.

Before the guidance, Boltz said borrowers had a better chance of winning the lottery than seeing their student loans discharged in bankruptcy.

“It’s just not insurmountable like it used to be,” he said. “… It’s better now, but we’d hoped that they would make it even easier.”

Easing the process would include viewing bankruptcy student loan discharges through a more administrative lens rather than with a mindsight of whether a prosecutor could win in court, he said. Expanding the criteria for undue hardship would also help.

Richard Cordray, chief operating officer of the Office of Federal Student Aid, said in the release that it’s “clear that this improved process is helping struggling borrowers.” He said that his office will work with the Justice Department to continue to streamline the bankruptcy discharge process and provide borrowers “a pathway to obtaining much-needed relief.”

Persis Yu, deputy executive director and managing counsel at the Student Borrower Protection Center, said that the guidance didn’t address all of the structural barriers that keep borrowers from seeing relief via bankruptcy.

“There was a concern about opening up the floodgates, and that hasn’t happened,” she said. “It is really clunky. You still have to go through a bankruptcy process, which has a lot of barriers for a number of different reasons. Filing for bankruptcy can be expensive and be hard. It has social stigma behind it. It has other negative consequences behind it.”

The attestation form is helpful but still challenging and burdensome for an individual to fill out on their own. One purpose of creating the form, Yu said, was that more bankruptcy attorneys would be willing to help borrowers navigate the process, but that hasn’t quite happened yet. That’s in part because of the Justice Department’s slow pace and the uncertainty of how the cases will pan out.

“Creating the process will make it better for borrowers,” she said. “But in making it so that you have more certainty, you can expand access to making sure that folks are able to get the help that they need. That’s an important goal that is still in progress.”