The Biden administration announced on Thursday updated guidelines that will make it easier for those struggling with their student debt to discharge it in bankruptcy.
The new bankruptcy policy comes from the U.S. Department of Justice and the U.S. Department of Education, and allows federal student loan borrowers to prove that they're experiencing financial distress requiring a fresh start. Under the rules, the agencies may recommend that a bankruptcy judge discharge a borrower's student debt if they find their case warrants it.
Currently, it's difficult, if not impossible, for someone to walk away from their federal student debt in a normal bankruptcy proceeding.
"Today's guidance outlines a better, fairer, more transparent process for student loan borrowers in bankruptcy," said Vanita Gupta, associate attorney general of the U.S.
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The announcement comes as the White House is battling to defend its sweeping student loan forgiveness plan in the courts. The Biden administration stopped accepting applications for its program, which would cancel up to $20,000 in student debt for tens of millions of Americans, last week after Judge Mark Pittman of the U.S. District Court for the Northern District of Texas called the policy "unconstitutional" and struck it down.
The DOJ has appealed.
Before the Education Department closed its forgiveness portal, roughly 26 million people applied for the relief. Outstanding student debt exceeds $1.7 trillion, and even before the pandemic, some 10 million borrowers were in delinquency or default.
Student debt has a high bar for bankruptcy discharge
Student loans are currently treated differently than other types of debt in bankruptcy courts, and legal experts and consumer advocates have long said that the bar for being able to discharge the loans is too high.
In the 1970s, lawmakers added a stipulation that student loan borrowers had to wait at least five years after they began repayment to file for bankruptcy; the move came in response to concerns raised by policy makes and pundits that students would rack up a bunch of loans and then try to discharge them after graduation. In 1990, that waiting period was upped to seven years.
The rules changed again almost a decade later, requiring that people with federal or private student loans prove that their debt poses an "undue hardship" to discharge it in bankruptcy. Congress, however, never spelled out what that term means, and lawyers and advocates say the uncertainty leads to unfairness in the courts.
Federal Reserve chairman Jerome Powell has said that he's "at a loss to explain" why student loans are treated differently than other types of debt in the proceedings.
Around 250,000 student loan debtors file for bankruptcy each year, but fewer than 300 walk away from their education debt in the proceeding, according to research published in the Duke Law Journal in December 2020. That's a success rate of just 0.1%.
This is a developing story. Please check back for updates.