The numbers regarding student loan debt in the United States are staggering. There are 43.2 million people in the U.S. that owe a combined $1.56 trillion in federal student loans. The average debt load per borrower for federal student loans is $39,351. On top of that, there is $136.31 billion in private student loans outstanding in the United States. The massive volume of student loan debt works as a significant drag on the economy, particularly for people between the ages of 25 and 45 who must restrict their economic activity simply to service their loan debt.
And student loans, unlike almost all other types of debt, are extremely difficult to discharge in a bankruptcy case. In order to have a bankruptcy court discharge a debtor’s obligation to pay student loans, debtors must prove that repaying the student loans works an “undue hardship” on them. And to do that, the student loan borrower must sue the lender in bankruptcy court following the debtor’s discharge. It’s expensive to bring the lawsuit, and the rate of success for debtors is extremely low.
It appears that Congress might be willing to address this problem through relaxing the legal standard for discharge of student loans. Under a bill introduced in the senate by Senators Richard Durbin (D Illinois) and John Cornyn (R Texas) a bankruptcy debtor would be able to discharge their federal student loan debt if they have been in repayment of the student loan for a minimum of ten years prior to the date the bankruptcy case is filed. Under the proposed bill, the debtor who meets the ten- year threshold does not have to prove undue hardship to qualify for a discharge.
The bill, which is titled The Fresh Start Through Bankruptcy Act of 2021 would re-instate a legal standard for discharge that existed in the Bankruptcy Code prior to 1998. Until Congress changed the law in 1998, the legal concept was that aging, “stale” student loans could be discharged in bankruptcy. Congress repealed that section of the Bankruptcy Code and since that time, the ability of someone who has overwhelming student loan debt and limited resources with which to pay to get out from under a crushing financial burden has been extremely difficult.
Will this proposal pass? It’s too early to tell, but there’s a real possibility that something positive will happen with the bankruptcy law with respect to student loans. There’s support for the concept of student loan forgiveness; however, forgiveness does not have bipartisan support and the issue is fraught by concerns both of backlash from borrowers who paid back their loans, only to see a new generation of borrowers be relieved of that burden, and the issue of whether forgiveness should be means-tested, that is, does a borrower make too much money to deserve forgiveness. And if there is a means test, who will decide the cut-off point for income.
Using the bankruptcy law solves some of these economic and political issues. Since bankruptcy is means-tested, wealthier borrowers who seek a discharge will have to file a chapter 13 repayment plan, that will result in some of the student loan balance being repaid (chapter 13 does not usually require debts to be paid in full). So the means-test issue would be resolved by existing law. And the person who files a bankruptcy will only receive a discharge if they have been in repayment for a minimum of ten years, which would mean that a discharged loan would not be a windfall for the borrower/bankruptcy debtor. And there is support for the bill from both Democrats and Republicans, making getting the bill heard, debated and passed much more likely.
We’ll have to wait and see how this bill progresses through Congress. At Kain + Henehan, we’ll keep you updated on the bill’s progress, and we’ll certainly let you know if the bill becomes law.
If you have questions about student loans, or any other debt issues that are troubling you, contact us at Kain + Henehan. We’re here to help!