More Americans are discharging their student loans via bankruptcy
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A growing number of federal student-loan borrowers are filing for bankruptcy to get rid of their debt, a move that became far easier following a recent change to longstanding federal policy by the Biden administration.
Background: Last November, the Department of Education and the DOJ updated their bankruptcy guidelines to make it easier for borrowers to have their federal student loans erased in court.
The new guidelines require borrowers to fill out an application proving they are experiencing economic distress. Then, the federal government calculates whether a debtor’s expenses equal or exceed their income, and whether that is likely to persist in the future. If both options are true, then the borrower is allowed to discharge their student loans in bankruptcy.
- Previously, it was nearly impossible to discharge student loans via bankruptcy due to existing laws aimed at preventing potential abuses of the system, like students borrowing substantial amounts and then discharging their loans quickly after graduation.
The new changes are already having an impact. In the first 10 months of the Biden admin’s updated guidelines, 632 borrowers used bankruptcy to eliminate some or all of their student loans, marking a ~58% increase from before the pandemic. Biden officials say they expect that number to grow rapidly in the coming years as more Americans become aware that discharging student loans is an option.
🎓 Zoom out: The bankruptcy policy shift is part of the Biden admin’s wider efforts to forgive student-loan debt for eligible borrowers.
- Nearly 3.6 million borrowers have had $127 billion in student loans approved for cancellation since Biden took office, even after the Supreme Court struck down his wider ~$400 billion forgiveness plan.
- The Education Department has also changed how income-driven repayment programs work for lower-income borrowers, allowing for complete loan forgiveness after 20 or 25 years of regular payments.
📊 Flash poll: Do you agree with the Biden admin’s new guidelines making it easier for student loans to be discharged through bankruptcy?
See a 360° view of what media pundits are saying →
Sprinkles from the Left
- Some commentators argue that allowing student loans to be discharged through bankruptcy would do more good than harm for borrowers across the country, and that it should be a point of bipartisan consensus among lawmakers.
- Others contend that America’s student-debt problem could be partially or fully solved by allowing student loans to be discharged via bankruptcy, similar to essentially every other type of consumer debt.
- “Student loan payment pause is dead. Bankruptcy protection shouldn’t be.” –John Sandman, Philadelphia Inquirer
- “One way to tackle the student loan crisis: bankruptcy court” –Helaine Olen, WaPo
- “It’s smart to let needy students shed loan debt in bankruptcy” –Baylor Lariat Editorial Board
Sprinkles from the Right
- Some commentators argue that allowing bankruptcy to be an option is a much better plan for tackling the ongoing student debt crisis compared to the Biden admin and Democrats’ efforts to institute blanket loan forgiveness.
- Others contend that allowing student loans to be discharged in bankruptcy would force lenders to be more discerning about handing out loans for advanced degrees, and could help drive down overall tuition costs.
- “Biden’s Student Loan Forgiveness is Wrong. Here’s How to Handle College Debt Instead.” –Oren Cass, executive director of American Compass
- “To Curb Student Debt, Let Borrowers Declare Bankruptcy” –Allison Schrager, senior fellow at the Manhattan Institute
- “Student loan repayments are back. Will colleges continue to get a free pass for this mess?” –Carol Roth, Fox News
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