The Departments of Justice and Education are changing how they’ll handle cases in which borrowers want to discharge their federal student loans in bankruptcy.
The new guidance, released Thursday, will “ensure consistent treatment of the discharge of federal student loans, reduce the burden on borrowers of pursuing such proceedings and make it easier to identify cases where discharge is appropriate,” officials said in a news release.
Currently, borrowers have to show during bankruptcy proceedings that they would suffer “undue hardship” if the student loans are not discharged—a higher bar than for other types of debt. The bankruptcy judge makes the final decision on whether that standard is met, but the guidance provides Justice Department lawyers with standards and criteria to use in deciding whether to recommend whether the student loans should be discharged. For example, in weighing whether a person’s inability to repay debt will persist, the attorneys should consider if the borrower failed to obtain the degree for which the loan was procured.
The guidance applies to future and pending cases.
The Justice Department noted in the guidance that a “historically low probability of success” and the mistaken belief that student loans aren’t eligible for discharge could have deterred some borrowers from seeking relief through bankruptcy.
“Congress may have set a higher bar for granting student loan discharges during bankruptcy, but in practice that bar has become very difficult for deserving borrowers to clear,” U.S. under secretary of education James Kvaal said in a statement. “After decades of inaction in Washington, our Department of Education team was determined to partner with the Justice Department to craft clearer, fairer, and more practical standards to guide recommendations for student debt discharges during bankruptcy proceedings. This guidance is an important step toward helping struggling borrowers, many of whom never completed college or were misled into debt by dishonest schools.”
Advocates for debt relief were cautiously optimistic about the guidance but worried about whether it would be carried out in a fair and consistent manner.
“The current undue hardship method of student loan discharge is random, arbitrary and unfair,” National Consumer Law Center staff attorney John Rao said in a statement. “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 … The government’s prior approach of fighting borrowers’ claims of hardship indiscriminately exacerbated the problem.”
Rao said that the new guidance could provide “a meaningful avenue for relief,” but its effectiveness will depend on how it is implemented by the Departments of Education and Justice.