Biparty Bankruptcy Reform Bill Offers Alternative to Hope for Forgiveness or Lifetime Debt
While some progressive Democrats continue to push the president to write off student loan debt, a bipartisan effort is underway to overhaul the student loan system in another way: by making bankruptcy discharges more accessible to student debtors.
Senate Majority Whip Dick Durbin (D-IL), who chairs the Senate Judiciary Committee, and Senator John Cornyn (R-TX) announced a new invoice last week called the “FRESH START Through Bankruptcy Act of 2021” to better enable borrowers to seek student loan discharge in bankruptcy.
“Student loan debt follows you to your grave,” Durbin declared. “Our bipartisan bill finally gives student borrowers – some who have been misled into taking expensive loans by predatory for-profit colleges – a chance to get back on their feet when they have no other. realistic way to repay their loans. “
If passed, the bill would allow federal student loans to become eligible for discharge in bankruptcy proceedings 10 years after the borrower’s first loan payment is due. (Borrowers with loans of less than 10 years should follow the current process.)
Jason Iuliano, an associate professor of law at the University of Utah and an expert in student loan bankruptcy law, told Yahoo Finance that the bill’s 10-year waiting period was noteworthy.
“First of all, it would ensure that people who have struggled to pay off their student loans for at least a decade can benefit from the fresh start of bankruptcy and get their lives back on track,” Iuliano said. “And second, it would ensure that the credit market for student loans continues to function.”
The bill also proposes to increase “institutional accountability” by requiring colleges that receive federal loans from more than one-third of their students to “partially repay” the Department of Education (ED) if student loans are later discharged in the event of bankruptcy or “if colleges have consistently high default rates and low repayment rates.” “
“This is a great proposal that would help align the incentives of schools with the incentives of their students,” explained Iuliano. “Instead of engaging in an ever-growing arms race, underperforming schools would be forced to cut tuition fees or improve employment prospects for their students.”
About 45 million Americans hold more than $ 1.7 trillion in federally guaranteed student loans.
Student loan bankruptcy discharge
Paying off student loans through bankruptcy, while difficult, is not impossible.
That said, there was a time when it was a much easier process.
“Before 1976, student loans were treated like other types of unsecured debt bankruptcies. If you were facing financial ruin, you could get relief,” Durbin explained. “But then Congress got the idea that student borrowers were going to bankruptcy court right after graduation. This notion was based more on anecdotes than data. Congress began to pass laws to make it more difficult. “
Over time, the bankruptcy code has become more restrictive for all student debtors.
In most cases of personal bankruptcy involving student debts, a judge now applies the Brunner test – a three-part test applied to student loan borrowers who have initiated adversarial proceedings to pay off student debt – to determine whether specific student loans have caused a borrower undue hardship.
“Beginning in the Brunner case of 1987, courts have interpreted the phrase as setting an incredibly high bar for relief,” Durbin said. “To pass the Brunner undue hardship test, you have to convince a bankruptcy judge that there is no hope that you will ever repay it, while the education ministry or its guarantee agencies are on the other side arguing against you. “
While Durbin went on to stress that “proving undue hardship is almost impossible,” Iuliano disagreed.
The inability to specifically prove undue hardship “is not the case,” Iuliano said. Based on his research on bankruptcy cases, it is estimated that “60% of people who try to pay off their student loans in bankruptcy are successful. “
‘This is the first time that it is bipartisan ‘
Forced to choose between canceling student loans – favored by some prominent Democrats but taboo for most Republicans – and bankruptcy reform, many Republicans opted for the latter during the hearing.
“While I do not support the cancellation of all student debt … I do not see many good reasons to keep students with massive debt like life serfs from banks and life serfs from universities by not not allowing them to discharge their bankruptcy on their debt under appropriate circumstances, “Senator Josh Hawley (R-MO) said at the hearing, adding that the bipartisan bill was” a very sensible approach. “.
Senator Elizabeth Warren (D-MA), one of the main supporters of student loan cancellations, previously told Yahoo Finance that the US bankruptcy system is “fundamentally bad” when it comes to student debt cancellations .
“I filed for student loan bankruptcy [bills] for a long time, “Durbin said at the hearing.” This is the first time he’s been bipartisan. With this bill we see a growing bipartisan consensus that the status quo is not working and we need reform of student loan bankruptcy.
An attractive aspect of the bill, according to Iuliano, is that the legislation addresses the fundamental problem of tuition inflation by forcing schools to repay the federal government when students pay off their loans through bankruptcy.
“Schools sell a product for a price, and that price has to match what those students get for it,” said Cornyn, one of the co-sponsors. “This is why the second part of the [bill] creates a limited risk-sharing framework for schools, but enough students default on their loans and fail to keep repaying them. “
Coryn added that some schools have “taken advantage of the US taxpayer for too long and it is the students who are hurting their excesses, so I am happy to see this bill introduced today.”
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