Student Loan Debt

Possible Relief For Student Loan Debts? Don't Count On It... Yet

The Wall Street Journal recently published an article claiming the Trump Administration is considering relaxing the "undue hardship" standard for discharging student loan debt in bankruptcy. This would be a major change in long-term bankruptcy law, as Congress has shown little willingness to provide this relief. But, it does provide a glimmer of hope for millions who sink deeper into student loan debt.

READ THE ARTICLE HERE: Trump Administration Looking At Bankruptcy Options For Student Loan Debt.

The "undue hardship" standard makes it extremely difficult to discharge student loan debts through bankruptcy. The Debtor must face a severe hardship which prohibits them from paying the debt while also maintaining minimal living standards, the hardship must be long-term, and the debtor must have made a good-faith effort to repay the debt. As discussed in the article, proving this is difficult and costly, so much so that only 500 debtors even attempted it last year. In practice, it is not an option for the neediest consumers.

Congress must approve any permanent change, but the president can set enforcement policy to a more lax standard. Major bankruptcy reform last occurred in Congress in 2006, and even then it was mostly favorable to creditors. However, a strong push from the president could lead to popular support, especially among Congressional members in close electoral races.

This development is probably not reason to get too excited if you are facing large student loan debts, at least not yet. First, the president has been prone to bold declarations during his first year in office that are quickly forgotten, or there has been a lack of policy follow through. Second, as mentioned above, Congress would need to approve any sweeping or significant change beyond enforcement, and the creditor lobby has so far been stronger than the consumer lobby. Recent efforts have stalled, and there is no indication there is any momentum for change.

Finally, if the focus of relief is truly on the undue hardship standard, as opposed to broader change directed at different student loan situations, many consumers may still be beyond help. For instance, what will the new standard require? Will under-employment qualify, or must you be disabled or unemployed? What will constitute a "good-faith effort" to repay? Or will you even be required to make one? Not everyone who is overwhelmed by student loan debt is in the midst of severe hardship, but millions find the debt inflexible and oppressive. 

While this may be a negative view of the situation, it is realistic for any bankruptcy attorney. Congress just has not shown the willingness to do anything in this area. However, this may be an opportunity for rare bipartisan action, as this effort has so far been taken up by more liberal members. As student loan debts balloon to astronomical levels, effecting more and more voters, Congress may finally be forced to act, even if it is just to curry favor at the polls. Democrats and Republicans both hear the cries of student loan debtors.

Student loan reform in bankruptcy is inevitable in the long run, but cold cynicism tells me, "not yet".

Contact us if you are facing student loan debt, or any type of debt. I would be happy to discuss your options during a free consultation.