The Trump administration has quietly announced that it plans to review the notoriously high standard borrowers must meet to get rid of federal student loans in bankruptcy. But it’s still too early to tell whether that’s good news for struggling borrowers.
In a memo circulated Tuesday, the Department of Education requested public comment on what loan holders should consider when evaluating a borrower’s request to have their debts discharged in bankruptcy. These borrowers have historically faced an intense fight from the federal government. The DOE’s request for input indicates an interest in revisiting the government’s approach to these cases.
It’s still too early to say whether borrowers will benefit, said Ben Miller, the senior director of postsecondary education at the Center for American Progress, a left-leaning think tank. There’s both an optimistic and a pessimistic way to look at the Department’s announcement, he said. A Department spokeswoman declined to comment beyond the memo.
“There’s been press in the past about how the Department of Education is unbelievably aggressive pursuing bankruptcy claims and maybe the agency wants to take a step back and ask whether that level of aggressiveness is worthwhile,” he said. “There is a risk that they could make it even more restrictive than it is today.”
Borrowers can’t erase their federal student loans in bankruptcy unless they can prove that repaying them would cause an “undue hardship” — a standard created, but never defined, by Congress. Instead, the courts have defined the standard. In order to have their debt discharged in most jurisdictions, those struggling borrowers must prove they can’t maintain a minimal standard of living if they pay down the debt, that the situation won’t change in the future, and that they’ve made some effort already to pay down the loan.
It’s relatively rare for borrowers to even attempt to have their loans discharged in bankruptcy. That’s in part because they may struggle to afford a lawyer. But the government may also take a tough approach to these cases to discourage borrowers from trying to erase their debts in bankruptcy, said John Rao, an attorney at the National Consumer Law Center and a consumer bankruptcy expert.
The Department’s new public comment period seeks in part to ensure that borrowers who should have their loans erased are not “inadvertently discouraged” from seeking a discharge.
As college costs and student debt have increased over the past several years, attorneys and even bankruptcy judges have been looking for ways to help borrowers seeking to erase their debt in bankruptcy. Members of Congress also wrote to the Obama administration in 2014 asking officials to clarify their position on undue hardship. The resulting guidance actually made things worse for consumers. Rao said, “It suggested even more strongly that entrenched view of ‘we need to fight these.’”
Given that history, he’s hopeful that the Trump administration’s review will lead to guidance that encourages the government and its contractors to think more carefully about whether it makes sense to fight instead of settle with borrowers seeking a discharge who appear to have a decent case, he said.
“Since it’s hard to imagine how it could be made worse for consumers, I would hope then that this is a positive step, but it’s hard to know,” Rao said.
One area where Miller worries things could actually get worse for borrowers is in the question of the role income-driven repayment plans play in whether a borrower should have her debt erased. These plans allow borrowers to pay back their debts as a percentage of their income.
And the government often invokes the existence of these plans in trying to fight borrowers’ attempts to have their loans discharged in bankruptcy — essentially arguing that a borrower should turn to these repayment options instead. “The pessimistic question is: Does this mean the agency wants to provide greater interpretation of the role of income-driven repayment in the undue hardship test?” Miller said.