Before 1998, student-loan borrowers were able to have their federal loans forgiven by declaring bankruptcy after the seventh year of repayment. But legislation enacted that year removed that provision, making it difficult to discharge loans except in extreme cases.
Now the Education Department is signaling that it wants to take a closer look at streamlining the forgiveness process for borrowers.
The department announced on Tuesday that it would seek public comment on how to determine whether borrowers have met the high standard — “undue hardship” — required to have their loans forgiven.
The department did not comment further on the notice. But it is a signal from the Trump administration that it is at least interested in the issue. And if it is seeking to ease the burden for borrowers, it may have some unlikely allies on Capitol Hill.
Several Democrats, including Sen. Elizabeth A. Warren, Democrat of Massachusetts, have introduced legislation that would allow student loans to be discharged via bankruptcy.
It is probably true that the government “spends too much money chasing after debt that they’ll never collect on, and letting people who are never going to repay those debts discharge them in bankruptcy can be win-win for both the agency and for those borrowers,” said Clare McCann, deputy director for federal higher-education policy at New America. “On the other hand, given the huge number of benefits that exist, you don’t want the undue-hardship standard to be too broad.”One of those benefits, she said, is income-based repayment, which allows borrowers to repay their loans for a certain period of time based on their income.
Jason Delisle, a resident fellow at the American Enterprise Institute, agreed. “A lot of times when people sort of rail against the tough bankruptcy standards for federal student loans, they’re kind of ignoring the existence of the income-based repayment plan,” he said. Delisle studies higher-education financing and student-loan programs.
“There are definitely rare circumstances where, because of someone’s other financial problems, they wouldn’t be able to even pay the payments under income-based repayment,” Delisle said. “But that strikes me as the case where you need an exception to your bankruptcy rule — which is what we have.”
Congress has not yet established what “undue hardship” means with regard to students’ having their loans forgiven in bankruptcy; still, courts have set legal standards for proving it — and the standards, critics argue, may result in inequity in how undue hardship is calulated.
A 2011 study suggested that concerns over the difficulty of discharging student loans were overblown, and that nearly 40 percent of borrowers who seek to discharge their loans because of undue hardship succeed.