One of the potential accelerants that may further fuel the fire of increased bankruptcy filings is student loan debt. Currently, more than 40 million Americans owe about $1.7 trillion in outstanding student loans. Beginning with the COVID pandemic, the federal government paused repayments. That pause turned into a long hiatus which is about to end. As part of the recently enacted debt ceiling compromise, Congress mandated a resumption of federal student loan repayments. Specifically, interest will again be charged starting on September 1st and payments must recommence in October. Ideally, borrowers prepared for this long-anticipated change. But it is likely that a lot of younger adults, as well as their parents and even grandparents, may be shocked by the added cost in their family budgets and become stretched beyond their ability to pay on time.
In addition to the generous loan deferments provided during the pandemic and for months beyond, the Biden Administration planned to forgive households up to $20,000 in student loan debt. In total, about $430 billion owed to the federal government would be cancelled outright. But the Supreme Court just dashed that expectation in the Biden v. Nebraska, et al. case. On June 30th, by a 6-3 vote, the High Court ruled that the President lacked authority to cancel student loan payments. Writing for the majority, Chief Justice Roberts said that cancelling the debt would amount to rewriting the law "from the ground up” which the Executive Branch may not do.
Although the President is now pursuing alternative statutory justifications to provide student loan debt relief, any option is sure to face fierce opposition in Congress and strong challenge in the courts.
With two doors for student debt relief closed in recent weeks, will filing bankruptcy become a third and perhaps final option? In the past, it has been extremely hard – many would say unfair and nearly impossible – for student loan borrowers who are way over their heads in debt to find relief in the bankruptcy system. As previously explained on this web site, the Bankruptcy Code makes student loan debt non-dischargeable unless the debtor can show that repayment would create an "undue hardship.”
Both conservative and liberal jurists have decried the "draconian” gloss that many courts put on that standard. Some of the most outlandish cases involved a requirement that a debtor show utter "hopelessness” of medical recovery or condemnation of seeking a pastoral degree because churches simply do not pay sufficiently high salaries to permit repayment.
Over the last couple of years, bankruptcy courts have granted more and more student loan discharges than in the past. In addition, the U.S. Department of Justice (DOJ) announced more debtor-friendly standards for determining whether to oppose borrowers who assert an "undue hardship.” Neither DOJ nor the Department of Education has publicly revealed much information about the administration of these new standards, including how many debtors have applied and how much money debtors’ attorneys are charging to fill out the extra paperwork.
With the end of the student loan repayment moratorium and dashed hopes for loan cancellation, it is a sure bet that a large number of education borrowers will begin to explore bankruptcy relief. Most of those who would face difficulty in repaying student loans also carry other debts as well, such as credit cards, that could be wiped out in bankruptcy.
Pressures on DOJ to agree to discharges of federal student loans almost certainly will grow in the coming months. That will inevitably lead to more student loan debtor bankruptcies. The only question is how many more.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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