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When will Congress act on student loan bankruptcy reform?

by | Aug 23, 2021 | Student Loan Debt

U.S. Congress continues to grapple with bankruptcy reform on student loans. With rising college costs in the past 20 years, more and more students are taking out loans, and some are going into extreme debt. Many seek to have the debt discharged via bankruptcy, but that path only works in extreme situations. And, along the way, the U.S. Department of Education usually fights these borrowers at every step.

Most recently, on Aug. 3, the U.S. House Judiciary Committee held a hearing on student loan bankruptcy reform. The fact that such a hearing takes place shows that Congress remains aware of this problem. However, acting upon it is another story as lawmakers have difficulty coming up with a consensus. Meanwhile, student loan borrowers continue to wait while falling deeper into debt.

Proving ‘undue hardship’ remains difficult

Here are some of the reminders of just how student loan debt has infiltrated our country and culture:

  • An estimated 43 percent of college-attending Americans incurred a certain amount of education-related debt through 2018.
  • Today, roughly 45 million Americans have accrued more than $1.7 trillion in student loan debt.

In most situations, student loans cannot be discharged through bankruptcy. But borrowers who show the debt has caused “undue hardship” to them may get that debt discharged. However, this remains a difficult standard to meet, sometimes almost impossible.

Why? Because proving undue hardship requires borrowers to begin an “adversary proceeding” – similar to a lawsuit – against their lenders. Such a proceeding is time-consuming, invasive and costly. When it comes to money, borrowers do not have deep pockets, but lenders usually do. The odds favor lenders.

While a recent court ruling held that certain private student loans may be discharged in bankruptcy, that does not hold for most student loans, which are federal. We can only remain optimistic that federal lawmakers may act to help the millions of Americans struggling with student loan debt.