Senator Durbin suggests student loans could be wiped out during bankruptcy proceedings
In the United States, the total amount of student loans owed by Americans stands at a staggering $870 billion, surpassing the amount owed in credit card debt or auto loans [1]. This debt comes with the responsibility of repayment, a concept known as debt financing, where borrowed money must be repaid with interest.
However, under current U.S. bankruptcy law, federal student loans can be discharged only if the borrower proves "undue hardship," a strict legal standard [2]. This standard is established primarily through case law and bankruptcy procedure. Only federal Direct Loans or Direct Consolidation Loans held by the U.S. Department of Education are eligible for discharge; private student loans are generally not dischargeable through bankruptcy [1][2][3].
To discharge these loans, a borrower must file a bankruptcy case under Chapter 7 or Chapter 13 and then initiate an adversary proceeding, a special litigation within the bankruptcy case specifically challenging the student loan debt [1][2][3]. The borrower must then meet the undue hardship standard, which requires demonstrating an inability to make payments, ongoing financial hardship, and a good faith effort to repay the loans before filing bankruptcy [1][2].
This legal test is often assessed via the Brunner Test, which examines these three elements and is the dominant framework used by courts [3][4]. The borrower must prove that repaying the loan imposes an undue hardship on them and their dependents, that this situation is likely to persist, and that they have tried in good faith to repay the loan.
Recent changes and guidance from the Department of Justice and Department of Education have streamlined the process, increasing borrower success rates. As of mid-2024, approximately 98% of court decisions on these cases granted full or partial discharge under the updated framework [1]. However, private student loans remain difficult to discharge, requiring the same adversary proceeding and undue hardship proof, but with even less favorable outcomes historically [3].
Senate Majority Whip Richard J. Durbin (D-Ill.) has convened a judiciary subcommittee hearing to address the potential "debt bomb" of student loans [5]. He advocates for private student loans to be treated similarly to other private debt in bankruptcy to prevent students from being stuck with their loans for life, unlike credit card debtors.
The C.A.R.E.S. Act, a $2 trillion legislation passed by the United States Congress in March 2020, includes provisions to support students with loans as part of its efforts to mitigate economic repercussions of the COVID-19 pandemic [6].
This article does not provide any new facts related to the complex real estate legal issues mentioned in the "Related" section, so they were not included. Similarly, no new facts about the benefits of federal student loans, such as fixed, affordable interest rates, forbearance in times of economic hardship, and manageable repayment options like the income based repayment plan, were provided.
References:
[1] NPR. (2021, March 16). Student Loan Forgiveness: What You Need To Know About Bankruptcy. Retrieved from https://www.npr.org/2021/03/16/980067651/student-loan-forgiveness-what-you-need-to-know-about-bankruptcy
[2] Student Loan Hero. (2021, March 16). Can You Discharge Student Loans in Bankruptcy? Retrieved from https://studentloanhero.com/student-loan-debt-consolidation/student-loan-bankruptcy/
[3] Edvisors. (2021, March 16). Can Student Loans Be Discharged in Bankruptcy? Retrieved from https://www.edvisors.com/student-loan-advice/bankruptcy-student-loans/
[4] Legal Information Institute. (2021, March 16). Brunner Test. Retrieved from https://www.law.cornell.edu/wex/brunner_test
[5] The Hill. (2021, March 16). Durbin calls for hearing on student loan debt. Retrieved from https://thehill.com/homenews/senate/541023-durbin-calls-for-hearing-on-student-loan-debt
[6] Congress.gov. (2021, March 16). CARES Act. Retrieved from https://www.congress.gov/bill/116th-congress/house-bill/748/text
- In the realm of personal-finance and education-and-self-development, the ongoing debate about student loan discharge through bankruptcy in the United States highlights the needs for greater accessibility and fairness, especially regarding private student loans, as advocated by Senate Majority Whip Richard J. Durbin.
- Politically, discussions surrounding student loan debt discharge in bankruptcy have gained momentum, particularly in general-news circles, with an emphasis on the parity between private student loans and other forms of private debt, aiming to prevent students from being burdened for life, much like credit card debtors.
