- The vast majority of student loan borrowers who file for bankruptcy don’t seek to have their educational loans discharged. But of those that do, around 60% won some relief.
- While additional avenues exist, they can be very difficult to take advantage of in practice.
- Borrowers with permanent disabilities and borrowers who work in public-sector fields such as military service, law enforcement or public education can also get relief, though it’s not easy.
If you’re confused by the laws governing your student loans, you’re far from alone.
To start, due to Covid-19, the federal government – which owns the vast majority of the $1.7 trillion of student debt outstanding – put in place emergency relief measures for student loan borrowers. It temporarily suspended payments, stopped collections on defaulted loans, and cut interest rates down to zero on its $1.59 trillion portfolio of student debt. The remaining $140 billion or so of privately-issued student loans weren’t impacted by these pandemic relief measures, which are set to last at least through Sept. 30.
The pause has prompted student borrower advocates to urge the Biden administration to extend the relief until it fixes problems plaguing the patchwork of various student loan forgiveness and repayment programs that Congress has created since the mid-19 60s. Some advocates are even calling for outright cancellation of student debt.
“Before resuming payments on student loans, the Department of Education must undertake significant structural reforms, provide real, immediate relief, and cancel a significant amount of federal student debt,” said one recent letter to President Joe Biden signed by more than 125 groups.
It’s not yet clear if those efforts will succeed and whether borrowers will be given any permanent relief in the post-pandemic world. To help you navigate the options that are available now, here’s a quick guide to what you can do to manage your student loan debt, along with some common pitfalls that frustrate borrowers.
The most drastic measure is also one that borrowers often shy away from: bankruptcy.
The process is confusing and, even in bankruptcy, many borrowers wrongly assume that student debt is impossible to get rid of. A recent study by Jason Iuliano, a law professor at Villanova University who specializes in bankruptcy and student loan issues, found that some 99.8% of student loan borrowers who filed for bankruptcy didn’t seek to have their educational loans discharged. But of those that did, around 60% succeeded in winning some relief, either by cutting deals with lenders or obtaining discharge orders in court.
“When you look at the people who bring these cases, they’re by and large very successful,” Iuliano told Insider in May.
Underscoring how confusing this process can be, until recently, a presentation on the website of one of the nation’s most prominent bankruptcy courts said that student loans are not dischargeable in bankruptcy – except that one of the court’s judges canceled about $220,000 of one borrower’s student debt in a 2020 ruling.
The U.S. Bankruptcy Court for the Southern District of New York updated the presentation after Insider inquired about the language. It now says that there are exceptions to the general prohibition on the cancellation of student debt in bankruptcy, which is a hot topic these days as millions of borrowers struggle financially due to the economic toll of the COVID-19 pandemic.
Unlike with credit cards and other consumer loans, seeking a discharge of student debt in bankruptcy requires an extra step – a lawsuit petitioning a judge to discharge the loans. And as Insider recently reported, few borrowers are willing to take that chance thanks to a widely-held belief that student debt is categorically exempt from discharge.
It’s not. There are exceptions. Here’s what the law says:
Borrowers of any educational debt – whether federally-backed or private – can have their student loans canceled in bankruptcy if they can show that paying them off would impose an “undue hardship.” Typically, that requires a borrower to demonstrate that they cannot maintain a minimal living standard, that their circumstances are unlikely to change, and that they’ve made good-faith efforts to repay their loans. Proving undue hardship is the only way for bankruptcy filers to get rid of any student loans owned or backed by the federal government.
Proving “undue hardship” has traditionally been difficult for borrowers, but bankruptcy judges are beginning to take a fresh look at this standard and how to apply it to borrowers in dire financial straits. Kevin Rosenberg, a Navy veteran, got a discharge for around $220,000 of his loans from a judge in the Southern District of New York when he successfully argued that repaying the debt would cause him undue hardship. His lender is appealing, but the case made headlines when the judge ruled that she would not perpetuate the “myths” that student loans are not dischargeable in bankruptcy.
Borrowers who owe privately-issued loans have even more exceptions they can rely on. That’s because “private” student debt isn’t defined anywhere in the U.S. bankruptcy code. Instead, the law refers to “qualified education loans” – those made for direct education expenses like tuition, books, room and board at accredited colleges and universities. Private student loans meeting that definition can’t be erased in bankruptcy, absent a showing of “undue hardship.”
But that still leaves borrowers of private student loans with a few different avenues for arguing that their loans can be discharged in bankruptcy.
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One involves looking at whether a student loan was made to attend a school that’s covered by the “qualified educational loan” definition. Accredited four-year colleges and universities and graduate schools that participate in the federal government’s student loan programs fall under that definition. But many for-profit colleges and vocational schools – such as beauty or barber school or training to get a pilot’s license – do not. If you aren’t sure if your private loans qualify, check whether your college also offers federal student loans; if it doesn’t, then your private loans are probably not “qualified educational loans” (and check the IRS website for more guidance).
Another argument involves looking at whether the private student loans were incurred to cover only direct education expenses. A private student loan for $20,000 that’s used solely to pay tuition at a four-year state university can’t be cancelled in bankruptcy, absent a showing of “undue hardship.” But if a student took out $40,000 and the extra $20,000 didn’t cover any direct costs of attendance, that could enable the borrower to argue that the loan is not exempt from discharge in bankruptcy, according to student loan attorney Austin Smith.
A third argument involves looking at whether a borrower was an eligible student when he or she took out the private loans. Eligibility usually entails studying full or part-time. Borrowers who attended classes less frequently– such as weekend studies for just a handful of credits a semester – may be able to argue that their loans didn’t meet the “qualified educational loan” definition and therefore aren’t exempt from discharge in bankruptcy
Lawyers like Smith are finding increasing success making such arguments in front of bankruptcy judges. But many borrowers still find it hard to get legal help or have trouble affording a lawyer who can help them navigate these complex rules. And going through bankruptcy is not easy: It can ruin your credit for years and make it difficult to obtain new loans.
Options Outside of Bankruptcy
Over the years, Congress has set up several avenues for borrowers to have their loans forgiven if they meet certain eligibility criteria. These programs don’t require filing for bankruptcy and they only apply only to borrowers of federal student loans. Here are some of the big ones:
In the early 1990s, Congress enacted a new pathway to student loan cancellation when it created the first of what’s come to be known as income-driven repayment plans, or IDRs.
These plans vary in design but they all have one thing in common: They’re meant to ease the burden of student debt by scaling student loan payments to a percentage of borrowers’ discretionary income – between 10% to 20% – and extending repayment periods up to 25 years, after which any remaining balances are forgiven if borrowers stay current. Later revisions of the IDR program shortened that 20 years for some borrowers.
These plans generally apply to students who borrow directly from the Department of Education. But according to the National Consumer Law Center, which advocates for borrowers’ rights, many borrowers who qualify for IDR plans don’t participate in the program.
Some loan servicers have been accused of steering borrowers away from IDR plans, while those borrowers who do attempt to access IDR also face difficulties enrolling and staying on the plans due to insufficient guidance on program requirements, lost paperwork, processing delays and inaccurate denials, according to the NCLC and a report from a federal watchdog.
Few borrowers manage to successfully overcome those obstacles, NCLC says. The group said in a March report that just 32 individuals have received the loan cancellation promised by IDR programs.
“There are just so many opportunities to fall short,” said Persis Yu, who heads the NCLC’s Student Loan Borrower Assistance Project. “We can’t rely on tens of millions of borrowers being hypervigilant for multiple decades to make the program work.”
Public Service Loan Forgiveness
This program, created in 2007, allows borrowers of direct loans from the Education Department to apply for forgiveness of their remaining balance after making 120 monthly payments while working full time in public-sector fields such as military service, law enforcement or public education.
Known as Public Service Loan Forgiveness, or PSLF, the program meant to encourage borrowers to seek out these vital but often low-paying careers. But since the first public service workers became eligible for debt cancellation in 2017, about 98% have had their forgiveness applications rejected, according to figures published by the Department of Education.
Student borrower advocates pin the low figure on government mismanagement and abusive industry practices which make it difficult for borrowers to successfully navigate the program requirements. They’ve asked the Department of Education to review the program and establish a new, streamlined path to cancel debt for all eligible borrowers who have served for a decade or more.
Secretary of Education Miguel Cardona recently acknowledged the program’s failings and committed to improving it.
“Ninety-eight percent of those who applied for Public Service Loan Forgiveness were rejected. Ninety-eight percent. We need to do better. We need to do better,” Cardona said during a virtual town hall with the National Education Association in April.
Cardona added the agency has the authority to review the program and pledged to do so: “That’s a priority for me,” he said.
Total and Permanent Disability
The oldest student loan relief program enacted by Congress involves borrowers who develop severe and lasting disabilities after taking out federal student loans. The system, known as Total and Permanent Disability discharge, was created in 1965 to spare these borrowers a lifetime of struggling to repay loans they can’t afford to repay due to being unable to work as a result of their disabilities.
A 2011 investigation by ProPublica and the Stabile Center for Investigative Journalism found that the program was plagued by a litany of problems, including having “no written medical standards for determining disability,” “no formal appeals process” for denials, and placing “undue burden and costs” on borrowers, according to an internal Department of Education document.
The investigation prompted the department to overhaul its regulations governing the program. In 2016, the department began sending out loan forgiveness letters to borrowers identified as eligible for TPD discharge by the Social Security Administration. The goal was to use the administration’s proven process for determining disability to offer eligible borrowers a simplified process to have their debt forgiven.
But five years later, the forgiveness process remains far from complete. Data obtained under a Freedom of Information Act request by the National Student Legal Defense Network showed that, as of Nov. 2019, the department had sent out some 571,000 offer letters to borrowers who had qualified for TPD discharge. But only around 218,000 had been approved for discharge, leaving more than 350,000 still waiting to successfully navigate the process.
A recent report by advocates for disabled borrowers concluded that bureaucratic hurdles and overly restrictive and narrow implementation of the discharge rules prohibits many borrowers from getting TPD relief even when they’re found to qualify for it.
“That’s a failure of the system,” Bethany Lilly, one of the authors of the report, said during a December virtual event about the report’s findings.
In March, the Department of Education announced a temporary easing of some rules related to the TPD discharge program during Covid-19. The agency said it would not require borrowers who have received a TPD discharge to submit earnings documentation, as required by the program rules, for the duration of the pandemic.
You can find a full list here of additional avenues for borrowers to seek forgiveness of their loans.
But there’s one big caveat: They can be very difficult to take advantage of in practice.
Cezary Podkul is an award-winning freelance journalist. He was previously a reporter at the Wall Street Journal, ProPublica, and Reuters.
Do you have a story or a news tip about student debt? We’d like to hear from you. [email protected]