The Department of Education is looking into loosening bankruptcy laws for student loan borrowers unable to repay their debt.
On Monday, the Department of Education released a Federal Register Notice requesting public comment on how to evaluate “undue hardship” in student loan bankruptcy claims. Some experts say it indicates the department may be willing to make it easier for borrowers to erase their student loan debt in bankruptcy, Inside Higher Ed reported.
Consumer advocates have long sought to make it easier for borrowers to discharge their debt through bankruptcy. Doing so has been a challenge unless borrowers are able to prove they face an undue hardship.
However, the term “undue hardship” has never been adequately defined by Congress so the courts have been able to set their own criteria. And creditors have often tried to block these types of claims through litigation. As a result, most undue hardship claims are difficult for borrowers to prove.
This fact prompted a number of Democrats, including Senator Elizabeth Warren, to send a letter to former Education Secretary Arne Duncan requesting more specific criteria be set for undue hardship claims. The following year, the department did release new guidance on the issue, but it left much to be desired for many Democrats.
Clare McCann, a former official under the Obama administration, said that the department’s request could signal that they are willing to expand how they define undue hardship. McCann added that it was important to strike the right balance so that the rules would apply to those individuals who would never be able to pay, without setting the standards too broadly.
But Jason Delisle, a fellow at the American Enterprise Institute, said the addition of income-based repayment plans in 2005 leaves little incentive to broaden the standards at all.
“There are costs that go well beyond discharging loans for people who can’t pay,” he said. “There are also costs to discharge loans for people who can pay.”
Outstanding student loan debt has reached a total of about $1.4 trillion and the default rate is over 11 percent. But it is unclear whether the department will take any action going forward or whether this will lead to any new policy changes.
Many experts recommend that bankruptcy be considered a last resort for struggling borrowers. Borrowers who are unable to repay their loans can apply for forbearance, which can postpone payments for up to a year. And qualifying for deferment may allow borrowers to postpone their payments for up to three years. However, private student loan borrowers do not have these protections, complicating the repayment scenario for a struggling borrower.