The Final Call

Bankruptcy: An option for student loan debt?

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WASHINGTON—Robert F. Smith changed the lives of 396 Morehouse College graduates when he announced at their May commencement that he was paying their student loans which could total as much as $40 million. 

For the rest of the more than 44 million Americans who owe about $1.5 trillion in student loan debt, many have considered discharging their student loans through bankruptcy, but that has not been an option.

Prior to 1976, federal and private student loans were dischargeable through bankruptcy, today, however, federal legislation prevents it. About 11 percent of student loan debt was in default or seriously delinquent at the end of 2018, according to the New York Fed.

All that may change with Senator Dick Durbin’s (D-IL) bill, the Student Borrower Bankruptcy Relief Act of 2019.

“Filing for bankruptcy should be a last resort, but for those student borrowers who have no realistic path to pay back their crushing student loan debt, it should be available as an option to help them get back on their feet,” he said. “Our nation faces a student debt crisis, and it’s time to restore the meaningful availability of bankruptcy relief to student loan borrowers.”

Introduced on May 9, the act has bipartisan support that includes cosponsors Sen. Elizabeth Warren (D-MA), Rep. Jerrold Nadler (D-NY) and Rep. John Katko (R-NY). The act would allow private and federal student loans to be treated like nearly all other forms of consumer debt.

“Long before I came to the Senate, I fought my heart out to keep student loans dischargeable in bankruptcy. But over and over again, Congress chipped away at this critical protection for student loan borrowers,” said Sen. Warren. “The Student Borrower Bankruptcy Relief Act fully restores this protection, and I’m thrilled to work with Senator Durbin to fight for this legislation.”

Most forms of debt, such as credit card debt and medical debt, can be discharged through the bankruptcy process.  That process rejects only a limited number of debts, such as child support payments, alimony, overdue taxes, and criminal fines, which are treated as non-dischargeable in bankruptcy.  Federal law also makes student loan debt non-dischargeable except in extremely rare cases.

“Americans across the nation are facing crushing student loan debt that is preventing them from purchasing homes and living the true American dream. We must ensure that Americans are able to invest in their education and then go on to live quality lives without the cloud of rising debt hanging over their heads,” said Rep. Nadler.

After 1976 Congress began steadily narrowing the grounds upon which student loan bankruptcy relief could be granted until, in 1998, federal student loans were made completely non- dischargeable absent a showing of “undue hardship” which courts have construed to be nearly impossible to demonstrate. 

In 2005, Congress also made private student loans non-dischargeable in bankruptcy leaving student borrowers who find themselves unable to repay their loans indebted with them for life. 

The Student Borrower Bankruptcy Relief Act of 2019 is supported by the Americans for Financial Reform, the Center for Responsible Lending, Consumer Federation of America, Consumer Reports, the National Association of Consumer Advocates, the National Association of Consumer Bankruptcy Attorneys, and more. 

Cheye-Ann Corona, senior policy associate for the Center for Responsible Lending, said, “While many graduates strive to repay their debt in a timely manner, thousands of others struggle to make ends meet. That is why it’s important to have legislation that will provide vulnerable student loan borrowers who cannot repay their debt with a pathway to reestablish their financial stability.

“While filing for bankruptcy should only be used as a last resort, it should be an option for students to get back on their feet. Congress must act now to provide student loan borrowers with options to alleviate their debt. Otherwise, millions of Americans will continue to delay or forgo purchasing homes, becoming entrepreneurs, and starting families; thus, negatively affecting the economy,” she said.

Cumulative student loan debt has surpassed credit card debt to become the second largest category of private consumer debt after mortgages, and student loan debt is the fastest growing segment of U.S. household debt, increasing by 157 percent since 2007. 

“The Student Borrower Bankruptcy Relief Act, which I am proud to lead in a bipartisan fashion with Chairman Nadler and Representative Katko, will restore the meaningful availability of bankruptcy relief to student loan borrowers to ensure that borrowers who have no other realistic options are able to discharge payments through bankruptcy,” said co-sponsor Rep. Joe Neguse (D-CO). 

“This legislation is just one measure we must pursue to solve the student debt crisis by providing meaningful assurance that student loan borrowers who find themselves in deep financial stress can have a second chance.”