New Legislation Introduced to Allow Student Loans to be Discharged in Bankruptcy

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By Savingforcollege.com

December 10, 2020

On December 9, there was new legislation introduced in the House and Senate to allow student loans to be discharged in bankruptcy. The legislation was introduced by Senator Elizabeth Warren and other senators.

While not impossible, currently it is very difficult to discharge both federal and private student loans in bankruptcy. Discharging student loans in bankruptcy is harder than other debts, such as credit cards and personal loans.

Only 29 of 72,000 student loan borrowers with active bankruptcy filings in 2008 succeeded in getting a full or partial discharge of their student loans, according to Educational Credit Management Corporation.

For federal student loans, currently you need to file an adversary proceeding to request that the bankruptcy court find payment would “impose undue hardship to you and your dependents”, according to the Department of Education. This means that if you continued to repay the loan, you would not be able to maintain a minimal standard of living and that the financial hardship will continue for a significant time of the life of the loan.

You must have also made efforts to repay the loan before turning to bankruptcy. 

If this legislation is passed, there would be full rights restored to all student loans – both federal and private. If not, there are other options for managing student loan debt.

Other Options for Student Loans Besides Bankruptcy

There are other possibilities for discharging student loans that require specific circumstances, including:

There are options to temporarily pause payments if a borrower is struggling financially, including an Unemployment Deferment and Economic Hardship Deferment. Keep in mind that interest continues to accrue during a deferment (so the balance will grow), unless a loan is subsidized.

Another option for reducing the monthly student loan payment is enrolling in an income-driven repayment plan. These plans base the monthly payment on a borrower’s income and family size.   

More and more employers are also starting to offer student loan repayment assistance. Depending on a borrower’s career, there could also be an option to have student loans forgiven after a set number of payments are made.

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