The Current Status of Student Loans in Bankruptcy and Recent Developments Outside of the Context of Bankruptcy

October, 2022

Generally, for most borrowers, student loans remain non-dischargeable in bankruptcy.
The burden on the borrower to prove “undue hardship” is an insurmountable standard for most borrowers to attempt to discharge student loans in bankruptcy.  However, President Biden’s August, 2022 announcement regarding possible one-time student loan forgiveness for those within certain income limits, under $125,000 for individuals and $250,000 for those filing joint tax returns, has renewed discussions about the status of student loan debt and there are, in addition to one-time debt cancellation of student loans for those who qualify, additional developments regarding student loans outside the realm of bankruptcy which may offer assistance to those with student loan debt.

Debt Cancellation

The one-time cancellation program provides for reduction of debt up to $10,000 in federal student loan debt and an additional $10,000 (total potential forgiveness of $20,000) for those who received a Pell Grant.  If the loan balance is less than these amounts, then the remaining balance is cancelled.  If a balance remains after cancellation the Department of Education has stated, the Department will recalculate payments based on the lower balance.  Some borrowers, those whose relevant income data is already available to the Department of Education, may be automatically eligible to receive relief without the need to apply, while others for whom the Department of Education lacks sufficient information, will need to apply.  This program applies only to those with Federal Direct Loans.  For those whose student loans do not qualify, there may be efforts to expand the forgiveness program or an opportunity to consolidate non eligible loans to a qualifying loan to make then eligible now.

Additional Developments, including Payment Pause Extension until January 1, 2023, Fresh Start for Borrowers in Default, Waiver of some previous requirements under the Public Service Loan Forgiveness Program and news about Loan Cancellation for Students attending certain for-profit schools.

Payments for student loan payments on all qualifying student loans will continue to be paused until January 1, 2023.  Interest will continue to be paused as well and all collections efforts will also not resume until after January 1, 2023.  The time period the Department of Education has paused payments will count towards Income-Driven Repayment Plans, Public Service Loan Forgiveness programs who are otherwise eligible.

In addition, the Department of Education has announced that it will offer borrowers in “default” a temporary opportunity for a fresh start in repayment.  The program mitigates the effect of past delinquency and default and permits borrowers to begin making payments in good standing when the payment pause ends.

The Public Service Loan Forgiveness Program provides for the potential forgiveness of remaining balances of eligible loans for borrowers who work full-time in public service jobs and make 120 qualifying monthly payments through an eligible repayment plan.  The details of the program were quite complex and very few borrowers have thus far succeeded in achieving forgiveness as a result.  The one-time waiver of the complex requirements will attempt to correct many of the deficiencies created by the complex rules and the effects of the application of the rules on loan forgiveness. Borrowers may need to take action by October 31, 2022, in order to take advantage of the waiver.

Those owing student loans who have been denied “borrower defense applications,” or those whose application was not acted upon within certain time frames, may benefit from a recent class action settlement which extends deadlines for consideration and requires action by the Department of Education on applications within a set time frame.  In addition, the Department of Education is automatically discharging student loans who attended four multi-campus for profit schools based on systemic misconduct by the following schools: Corinthian College, ITT Technical Institutes; Westwood College and Marinello Schools of Beauty.  There are beginning dates of attendance for eligibility for each, and borrowers are encouraged to verify their eligibility.

If you owe money on student loans, there may be help and assistance available to you in addition to possible eligibility for limited forgiveness.  All readers are encouraged to be proactive in exploring the potential benefits of the changes generally outlined here as well as other changes that have been proposed and those currently under discussions.


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