Next Stop for Student Loan Reform: Bankruptcy?

Student Loans Have Been a Sticking Point in Bankruptcy, but No More?

Until recently, student loans have been just about the stickiest debt there is, nearly impossible to discharge in bankruptcy proceedings. Now, however, the U.S. Department of Justice has unveiled new policy guidelines that may change how the federal government responds to borrowers with the greatest financial struggles. 

Bankruptcy and Student Loans: Two Separate Worlds

While bankruptcy can eliminate most debts, student loans have typically been excluded. In fact, they’ve been just about the only type of debt kept out of bankruptcy discharges, which meant that they either had to be paid or forgiven through a program like PSLF. The only other circumstance under which it could be discharged was the death of the borrower. This precedent, however, has been slowly eroding over the last couple of years thanks to several court challenges.

Will Student Loans Become Dischargeable under Bankruptcy?

Although this recent policy guidance bodes well for student loan borrowers pursuing bankruptcy, it’s difficult to tell whether this will be a permanent shift. The change reflects the ongoing efforts of the Biden Administration to reform the federal student loan system, and is consistent with earlier decisions to not challenge court rulings on student debt discharge. In the past, however, student loan lenders and servicers have aggressively pursued debts and have held considerable leverage in court, which they’re unlikely to willingly give up. And we can expect partisan legal challenges as well, just as we’ve seen with other student loan relief efforts.

If you’re struggling under the cost of repaying your student loans, there is help! Contact your student loan professionals with any questions you have about student loans, whether broad or specific, big or small. We’re here to help! 

If you have Federal Student Loans, schedule your free 15-minute Discovery Session to find out if your loans can be forgiven after 25 years.