Senators Introduce Biparty Bill to Allow Bankruptcy Student Loan Discharge – Forbes Advisor


The debate over student loan reform continues as lawmakers question whether they can be discharged in bankruptcy.

The Senate Judiciary Committee met on August 3 to discuss how student loans are handled during bankruptcy proceedings. Student loans cannot be canceled in bankruptcy except in cases of undue hardship, a term that has no precise definition and belongs to the courts.

Most borrowers are unsuccessful in their lawsuits to include their student loans in bankruptcy. But a new bipartisan bill aims to change that and overhaul the entire student loan system.

New bill would allow bankruptcy student loan release after 10-year waiting period

During the hearing, Senators Dick Durbin (D-IL) and John Cornyn (R-TX) briefly introduced a new bill that would revise the discharge of student loans in bankruptcy rules.

The Bankruptcy Fresh Start Act allow student loan borrowers to pay off federal student loans after a 10-year waiting period. Colleges with more than a third of their students receiving federal student loans would be required to partially repay the government if the student loans were later released from bankruptcy.

Durbin, who has introduced and co-sponsored student loan reform bills in the past, noted that this would be the first bipartisan effort to reform bankruptcy rules.

The rules for discharging a student loan in bankruptcy have evolved over the past 20+ years. Bankruptcy student loan discharge waiting times previously ranged from five to seven years. But in 1998, Congress rewrote the Higher Education Act and eliminated the waiting period for student loan release eligibility; this would only be possible if a borrower proves undue hardship, which Durbin described in this week’s hearing as “nearly impossible”.

“We made a mistake in 1998,” Durbin said. “Undue hardship shouldn’t be the only way to settle student loans in bankruptcy. We should go back to what it was before 1998, when borrowers could apply for relief after a long waiting period. This system worked.

The 10-year waiting period, according to lawmakers and hearing witnesses, would reduce the “moral hazard” of borrowers taking on exorbitant amounts of student loan debt assuming they would never have to be paid off in full.

A witness, Dr. Beth Akers, a senior researcher at the American Enterprise Institute, a right-wing think tank in Washington, DC, noted that bankruptcy reform would “create an effective fix” to the inadequate repayment system, but would involve risks. .

Akers said allowing private loan cancellations could make it more difficult for students to borrow if lenders are concerned about their ability to repay, as eligibility for private loans largely depends on the credit history of the student. ‘borrower. But if lenders are worried about the chances of a loan being canceled in a possible bankruptcy proceeding, it could prompt them to offer fewer unaffordable loans up front.

Hearing participants agree: student loan overhaul is needed

The hearing also addressed the general state of the federal student loan system and its failures, including higher education costs rising faster than inflation and borrowers taking on more debt than they can repay. .

“We need to look at the entire higher education ecosystem to address these challenges – recommendations to change the bankruptcy code would only address the symptoms of the larger problem,” said Senator Chuck Grassley (R -IA). “If we don’t correct the underlying causes, we close the barn door once the horse is out. “

Forty-five million borrowers collectively owe $ 1.57 trillion in student loans, according to the Federal Reserve Bank of New York’s latest household credit and debt report. It is a financial burden known to delay important life stages, such as homeownership or having children, for many Americans.

Borrowers defrauded by for-profit colleges were also the focus of the hearing.

A witness, Diane Barta, a network manager living in Richmond Hills, Georgia, has over $ 120,000 in student loan debt outstanding. Berta racked up most of the debt during an online masters program at a for-profit online school, the University of Ashford.

Barta, who filed for Chapter 13 bankruptcy but was unable to include her student loans in the process, now faces monthly payments of over $ 1,000 a month and says she is making too much money for be eligible for an income-based refund.

“If I had been able to pay off my loans in bankruptcy, no matter how painful the filing was, it would have been a great relief in the end,” Barta said. “I still wouldn’t have sleepless nights worrying about how I’m going to pay and what will happen to my kids, my husband and me if I can’t. “

Some victims of for-profit colleges have been granted student loan waivers by the Department of Education, such as ITT technical institute. But that relief only came after years of litigation. Opening the door to the discharge of student loans in bankruptcy could speed up the process and provide more relief to borrowers.

Is student loan reform blocked by Washington?

The goal of student loan reform is a political hot potato. Lawmakers and the President are all pushing for some sort of overhaul of the student loan system.

In 2005, President Joe Biden supported changes that made it difficult to release the student loan in bankruptcy. Now he takes a very different stance. He has supported the discharge of student loans through bankruptcy plans in the past and is currently being pushed by some lawmakers to extend the forbearance period for federal student loans, which expires on September 30.

Read more: Will Biden Extend Federal Student Loans Forbearance?

There is also an endless quest by some Democrats to get Biden to write off up to $ 50,000 in student loan debt per borrower. House Speaker Nancy Pelosi (D-CA) recently said Biden does not have the power to write off student loan debt, only Congress does.

For now, the approach of adding student loan debt to the qualifying bankruptcy discharge is welcomed by experts. Leslie Tayne, a debt relief lawyer in New York, says the Fresh Start law could benefit consumers, but it may still have a long way to go before it becomes law.

“Bankruptcy laws are not updated / reformed very often; the last major review of consumer bankruptcy laws was the Bankruptcy Abuse Prevention and Consumer Protection Act 2005, ”Tayne told Forbes Advisor in an emailed statement.

And while the bill was passed in 2005, discussion in Congress on the bankruptcy overhaul began around 1998. Tayne also points to the Consumer Bankruptcy Reform Act of 2020, which was introduced to make bankruptcy less costly and less complicated for consumers – totaling two decades of bill discussion, implementation and reform.

“It can take years for Congress to approve and implement changes to the law,” Tayne said.

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