According to the G.19 Consumer Credit Report recently released by the Federal Reserve, America's total student loan debt has topped $1.5 billion – and we are having trouble paying off that debt. At of the end of 2017, a whopping 11% of student loans were either ninety days delinquent or in default.
The Department of Education offers several avenues to help federal student loan borrowers deal with their debt. Options include income based-repayment plans that scale payments to discretionary income, consolidation loans that can lower monthly payments by extending terms, Public Service Loan Forgiveness programs, deferment, and forbearance. Borrowers with private loans have fewer options outside of refinancing.
However, one last-resort option for debt discharge – bankruptcy – rarely applies to student loan debt thanks to a Congressional mandate and a lack of clarity in that mandate.
To successfully discharge a student loan in bankruptcy, you must make the case that paying the debt can impose an undue hardship on you and your dependents. If you're filing for bankruptcy, paying off your student loan will cause a hardship almost by definition – but what makes that hardship undue?
Unfortunately, there is no standard legal definition of an undue hardship for student loan repayment. Since Congress didn't create a definition, courts typically use one of two tests to interpret the rule. The Brunner Test and the Totality of the Circumstances Test both contain further vague language, such as "minimal standard of living" (Brunner) and "reasonably necessary living expenses" (Totality of the Circumstances).
Borrowers must file a petition known as an adversary proceeding to get a determination of undue hardship. The burden of proof is on the borrower to show undue hardship – and given the poor record of success, multiple standards, and vague language, borrowers may choose not to pursue the undue hardship argument assuming they can't make the case.
The Trump administration is asking for public comment on what constitutes an undue hardship with respect to student loan discharge under the bankruptcy laws. The request by the U.S. Department of Education was posted on February 21, 2018.
A request for public comment does not guarantee that the definition of undue hardship will be properly clarified, or that the clarification will favor borrowers. Every time Congress revisits the issue of student loans and bankruptcy, the changes end up tightening the restrictions on student loan discharge.
However, the text of the request is promising. The Department of Education notes that the intent is to make sure an appropriate implementation of the bankruptcy discharge mandates. Hopefully, doing so would not inadvertently discourage borrowers – for whom repayment of their student loans would be an undue hardship – from filing an adversary proceeding.
In layman's terms, this statement implies that the current lack of clarity is discouraging people who could legitimately claim undue hardship from pursuing the claim – and the Trump administration wants input on how to make it easier for borrowers to make an informed decision.
This action won't help the majority of student loan borrowers – and it shouldn't. Bankruptcy is the last resort for dealing with student debt, or any debt at all. However, if you have reached the end of your viable options, you may be able to make a better case for discharging your student loan debt. We hope you never have to consider that option.