More student loan borrowers walk away from their loans in bankruptcy

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President Joe Biden delivers remarks about the student loan forgiveness program on October 17, 2022.

Leah Millis | reuters

More people with federal student loans have been able to get rid of their loans in bankruptcy court thanks to a Biden administration policy change announced last November.

In the fall of 2022, the US Department of Education and the US Department of Justice issued Updated Bankruptcy Guidelines Making it easier for struggling borrowers to have their student loans wiped out in court. Previously, it was difficult, if not impossible, for people to discharge their education loans in a normal bankruptcy proceeding.

“I am thrilled that our one-year review shows that our efforts are making a real difference to borrowers’ lives,” he said. Associate Attorney General Vanita GuptaIn a statement on Thursday.

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In the first 10 months of the new policy, student loan borrowers filed more than 630 bankruptcy cases, a “significant increase” compared to recent years, the departments said.

“Most borrowers seeking redemption have received full or partial redemption,” he said.

Outstanding student loans in the US exceed $1.7 trillion, and approximately 7% of student loan borrowers have balances greater than $100,000. Even before the COVID-19 pandemic, nearly 10 million borrowers were delinquent or in default.

Student loans had a high hurdle to discharge from bankruptcy

Student loans were long treated differently than other types of debt in bankruptcy courts, which was criticized by legal experts and consumer advocates.

In 2018, Federal Reserve Chairman Jerome Powell said that he “Unable to explain why student loans cannot be discharged in bankruptcy. Powell also warned that rising debt could slow economic growth over time.

The difficulty of repaying student loans in bankruptcy dates back to the 1970s, when lawmakers A condition was added Student loan borrowers used to have to wait at least five years after starting repayments to file for bankruptcy. The move comes in response to concerns raised by policymakers and pundits that students will rack up piles of debt and then try to get rid of them after graduation.

Higher education expert Mark Kantrowitz said these fears were largely exaggerated.

“Only borrowers who are experiencing extreme financial hardship may want to have their loans forgiven,” Kantrowitz said. “Bankruptcy discharge ruins your credit for seven years, barring you from getting credit cards, auto loans and mortgages.”

Still, in 1990, waiting period This was increased to seven years. And about a decade later the rules changed again, requiring people with federal or private student loans to prove that their loans “undue hardship“To discharge it.” However, Congress never specified what that term meant, and lawyers and advocates complained that the uncertainty led to impropriety in the courts.

“The new policy represents a softening of the tough stance on discharge of federal student loans,” Kantrowitz said. He said the courts are now moving in the direction of “treating student loans like other debts.”

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