Filing for personal bankruptcy can be a good way to get out from under crushing debt, but some types of debt are more difficult to discharge than others. Student loan debt can be especially difficult to escape, but it can be done.
The student loan mess
Increasingly, employers demand that their employees have a bachelor’s or even a higher degree. At the same time, the cost of higher education has risen rapidly. As a result, millions of Americans have had to take out loans in order to pay for the education they need. More than 90% of these loans are owned by the federal government.
By some estimates, more than 43 million Americans owe money for their educational loans, and the total amount of student loan debt stands at well over $1.5 trillion. The average amount a borrower owes is about $29,000, but many owe much more. This means student loan debt is a huge burden on the lives of millions of families, and holds back the U.S. economy as a whole.
The Biden administration has tried various approaches to ease this problem. After the U.S. Supreme Court blocked a major student loan forgiveness initiative, the administration has used its power to forgive loans for certain borrowers. with hundreds of thousands or even millions of them getting the good news at a time.
On a more quiet level, the administration has made it somewhat easier to discharge student loans through bankruptcy.
Undue hardship
The U.S. Bankruptcy Code makes it much more difficult to discharge student loan debt than it is to get rid of other common forms of consumer debt, such as medical debt and credit card debt.
Generally, to discharge a student loan, a borrower must go to court and show that the debt puts them in “undue hardship.” This term is vaguely defined. and so some courts are much more strict than others when they are deciding whether it applies to a specific case. Furthermore, the struggling borrower had to go to court against government agencies and private lending firms, which have the resources and motivation to fight against discharging a loan.
In late 2022, the Biden administration worked with the Education Department and the Department of Justice to announce new guidance that streamlined the process. Under the new guidelines, borrowers submit paperwork to the government, which determines whether their circumstances amount to an undue hardship. If the government finds an undue hardship, it agrees to refrain from fighting the discharge in court.
Last fall the administration revealed that the new policy had greatly increased the number of student loan discharges through bankruptcy. The Education Department found that 99% of undue hardship proceedings resulted in full or partial discharge under the new policy. However, this statistic applies only to a very small fraction of cases when compared to the tens of millions of Americans who still carry student loan debt.
Learn more
Student loan debt may represent a national crisis, but each case is very personal for the borrowers involved. Those who are struggling with debt can benefit from talking to experienced professionals about their options.
