Student Loan Debt Relief and Bankruptcy Reform

Student Loans Are in the News

From calls for debt cancelation by members of Congress, recent targeted debt relief actions taken by the Biden administration, to bankruptcy reform bills introduced in Congress, the crisis in student loan debt has been receiving a lot of attention over the past year.

In 1985-1986, the cost of a four-year degree in constant dollars at a public institution in the United States was $8,981, including room and board. By 2018, that figure had risen to $20,598, representing a 229% increase in the cost of education in less than four decades.

Student debt upon graduation has increased at a similar rate over this time. According to a report by the Education Data Initiative, student loan debt in the United States in 2021 now totals $1.75 trillion. That’s about $900 billion more than total U.S. credit card debt and this debt is growing six times faster than the nation’s economy.

In 2021, the average public university student with a bachelor’s degree graduated with $30,030 in student loan debt, while students who pursued graduate degrees at a public university graduated with significantly higher debt, as the following figures demonstrate:

• Average Master’s Student Debt: $46,593 (from graduate school alone)
• Average PhD Student Debt: $93,578 (from graduate school alone)
• Average Professional Doctorate (e.g., law, medicine) Student Debt: $144,266 (from graduate school alone)

All told, 45 million Americans carry student loan debt. The average borrower owes $39,351, and the average monthly student loan payment is an estimated $393. Currently, 11% of student loans are over 90 days delinquent, and 5.5 million borrowers are in default on direct loans from the government, amounting to $122 billion.

The cost of this debt is staggering. Studies indicate that while college graduates are generally able to make payment on the interest on their loans, many struggle to make payments toward the principal. This means that, after years in repayment, many student loan borrowers remain mired in debt, struggling to lift themselves out of poverty despite having a college degree. Apart from the financial burden, many of those struggling to repay these exorbitant student loans also experience high rates of depression and anxiety.

Some of these individuals will consider bankruptcy as a way to get out from under this financial burden. However, while bankruptcy allows debtors to discharge many types of debt, under current bankruptcy law student loans are only dischargeable if the borrower can prove “undue hardship,” a strict standard that makes this a difficult and rare feat.

Many economists are concerned that our country is experiencing a student loan bubble and believe that, should it burst, the consequences for the US economy will be devastating. This concern was only heightened when the coronavirus pandemic brought the U.S. economy to a halt. While the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) placed federal student loan payments and interest accrual on hold for more than 35 million borrowers since March of 2020, this moratorium is set to end on January 31, 2022.

Given the personal impact of this debt, the growing threat it poses to the economy, and the limited options for discharging student loan debt under current bankruptcy law, many have been calling for the government to take action to address this crisis through measures like student loan debt cancellation and bankruptcy reform that would allow debtors to more easily discharge student loans in bankruptcy.

Student Loan Debt Relief: Calls for Action

Congressional Democrats, in particular, have been pushing for a number of measures to address the student loan debt crisis.

Progressive Democrats, including House representatives Alexandria Ocasio-Cortez, Ayanna Pressley, and Jamaal Bowman, have called for President Biden to forgive the nation’s entire student loan debt of $1.75 trillion for all 45 million borrowers.

Senators Chuck Schumer and Elizabeth Warren have suggested a less comprehensive but still significant approach to student debt relief, urging Biden to cancel up to $50,000 in student loan debt for all borrowers.

During his campaign for the presidency, Biden promised to immediately cancel $10,000 in student debt per person if he were elected. He even indicated a willingness to consider the Schumer/Warren proposal.

Since he’s been in office, however, President Biden has stated that mass student loan forgiveness of the kind the progressive wing of his party has asked for is off the table. He has also balked at canceling $50,000 for all borrowers, claiming he doesn’t believe he has the legal right to do so.

Student Loan Debt Relief: Action Taken By The Biden Administration

While he claims he is still in favor of canceling $10,000 in student loan debt, President Biden has yet to do so, instead opting for a series of more targeted cancellations. Since his inauguration in January, Biden has canceled more than $11 billion in student loan debt, including:

• Debt for borrowers with approved fraud claims against colleges, universities and career schools, and those who attended now-defunct institutions,
• Debt for borrowers with total and permanent disabilities,
• Interest on student loan debt for 47,000 current and former active-duty service members who were deployed to war zones, and
• Debt for public service workers through an overhaul of the Public Service Loan Forgiveness (PSLF) program, a historically failed program intended to help public service workers cancel their student loan debt.

While the Biden administration’s measures have helped hundreds of thousands of borrowers, the $11 million in canceled debt to date accounts for less than 1% of all federal student loans, leaving millions of people struggling to pay down their student loan debt.

With the moratorium on federal student loan payments ending on January 31, 2022, calls for further measures to address the student loan crisis continue. One area where progress is perhaps being made is in the area of bankruptcy reform.

Student Loans and Bankruptcy Reform

Over the past year, two bills have been introduced to Congress that propose significant changes to the bankruptcy code with respect to student loan debt.

The first, the Consumer Bankruptcy Reform Act (CBRA), was introduced to Congress in December, 2020 by Senator Elizabeth Warren (D-MA) and four other Democratic members of Congress.

The CBRA is a sweeping piece of legislation that proposes significant changes to many aspects of current bankruptcy law. Regarding student loans, the CBRA would amend the bankruptcy code to make both private and federal student loans fully dischargeable and treated like other unsecured consumer debts.

However, while the CBRA has broad support among consumer advocates and bankruptcy attorneys, the bill faces considerable opposition among credit industry groups. Even if the CBRA were to become law, it is far from clear how much that law would resemble the bill currently under consideration, including those provisions that address student loan debt.

A more recent bill that addresses student loan debt through bankruptcy reform is the bipartisan FRESH START Through Bankruptcy Act (S. 2598), which was introduced by Senators Richard Durbin (D-IL) and John Cornyn (R-TX) on August 3, 2021, during a full committee hearing of the Senate Judiciary Committee. Chaired by Senator Durbin, the committee was convened to discuss the student loan debt crisis and explore options for student loan bankruptcy reform.

Bipartisan FRESH START Through Bankruptcy Act

During the Senate Judiciary Committee hearing, Senators Durbin and Cornyn introduced their bipartisan bill to address the disparate treatment of student loan debt under current bankruptcy law and the “undue hardship” standard borrowers must meet to discharge student loans in bankruptcy.

The FRESH START Through Bankruptcy Act would:

• Make Federal Student Loans Eligible for Discharge in Bankruptcy ten years after the first loan payment is due for student borrowers who have no realistic path to pay back overwhelming student loan debt,
• Increase Institutional Accountability by creating provisions that require colleges to provide a partial refund to the government after a student loan discharge if more than one-third of the school’s students receive loans, and
• Retain the Existing Undue Hardship Option for private student loans and for federal student loans that have been due for less than ten years.

Because of its more focused and modest approach toward bankruptcy reform, many feel the FRESH START Through Bankruptcy Act has a better chance of becoming law than the Consumer Bankruptcy Reform Act.

Regardless, until one of these bills becomes law, borrowers will still have to prove “undue hardship” in order to discharge most student loans in bankruptcy.