Key Takeaways
- Under a new procedure for student loan borrowers filing for bankruptcy, 99% of applicants had at least some of their debt discharged.
- A streamlined process implemented last year is intended to make discharging student loan debt easier.
- Student loan debt has been more difficult to discharge through bankruptcy than other kinds of debt and borrowers seeking discharge faced high costs and low odds of success in the past.
A growing number of student loan borrowers in dire financial straits are discharging their debts through bankruptcy—a feat that was nearly impossible until the Biden administration changed the rules last year.
In the first 10 months since a new bankruptcy process was created last November, 99% of borrowers using it had at least some of their student loan debt discharged, the Department of Education said Thursday. Although only 632 people used the new process—a tiny number compared to the people who filed for bankruptcy in 2022—officials at the Department of Education expect the number to grow significantly as more lawyers inside and outside the government are trained on the new guidelines.
Bankruptcy courts treat student loan debt differently than other kinds of debt, because of legislation passed by Congress in the 1970s by lawmakers who were afraid highly educated and wealthy professionals would abuse the system. Debtors seeking to have their student loans discharged must go through the additional step of suing the government to prove their student loans cause “undue hardship.”
Proving undue hardship is so costly and difficult that only a bit over one in a thousand people with student loans who declared bankruptcy actually got their student loan debts discharged, according to a 2020 study by a Villanova law professor.
A new procedure instituted by the Justice Department last November standardizes and simplifies the process. Debtors going through bankruptcy can now apply to have their student debt discharged by filling out a 15-page form. Government attorneys assess the forms using new guidelines on what qualifies as “undue hardship.”
“It is clear that this improved process is helping struggling borrowers,” said Rich Cordray, chief operating officer of the Office of Federal Student Aid, in a statement. “In partnership with the Justice Department, we will continue working to streamline this process and to provide student loan borrowers a pathway to obtaining much-needed relief in bankruptcy.”
Bankruptcy still isn’t a painless cure-all for financial woes, whether with student loans or otherwise: Your property can be taken away in bankruptcy proceedings, and your credit is decimated for years. However, it can provide a fresh start for people with no better options, more so now that student loan debt is realistically possible to discharge.
The reforms to bankruptcy were part of a slew of changes to the federal financial aid system introduced last year, all designed to ease the financial burden on borrowers when the pandemic-era pause on interest and required payments came to an end in October.