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Education Department Wants to Review Federal Student Loan Bankruptcy Rules

The Department of Education has said it wants to review how federal student loans are discharged in bankruptcy. Student loans are currently very difficult to discharge in bankruptcy due to the “undue hardship” requirement.

Unlike other forms of debt in bankruptcy, you must first demonstrate that repaying your student loans would make you unable to maintain a minimal standard of living (undue hardship) to receive a discharge. However, Congress never determined what constitutes undue hardship, so it is up to courts to make this determination for each individual bankruptcy case. The Department of Education is seeking public comment on how undue hardship should be evaluated.

Bankruptcy courts currently use one of two tests to determine undue hardship. Depending on the court, the Brunner test or the totality of circumstances test may be used. If the borrower successfully demonstrates undue hardship, the loans are discharged like other debts.

There are a couple of important points to make about this news. First, it does not mean the Department of Education is necessarily getting ready to make a major policy change on student loans. Second, the Education Department’s authority only extends so far. While the Education Department could issue recommendations, it cannot change the existing policy without congressional action. As a department within the Executive Branch, it simply lacks the authority.

The Education Department’s announcement should still be seen as good news for those with federal loans. Having a conversation about undue hardship could also convince federal lawmakers to do the same in the near future.

Can I Discharge Student Loans in Bankruptcy?

There are cases where you could discharge your student loans in bankruptcy. Even if it is difficult to discharge student loans, you should still speak with a bankruptcy attorney if you believe repayment is not possible. You may never determine whether you could discharge your loans if you do not pick up the phone to speak with a bankruptcy lawyer.

In addition to exploring bankruptcy, you could also determine whether you qualify for one of the Education Department’s income-driven repayment plans. However, you must have federal loans to enroll in these programs.

For future updates on personal finance and bankruptcy news, continue to follow Shuster Law Firm PLLC on Facebook and Twitter. If you have questions about filing for bankruptcy, you could call us to set up a consultation with Lewisville bankruptcy lawyer David Shuster.