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Can the US Department of Education Clarify its Policy on Student Loan Discharges in Bankruptcies?

As reported by Mark Keierleber of Washington DC, 7 Democratic members of Congress are pushing for clarity and lenience in how the Department of Education and its contractors forgive student-loan borrowers who are bankrupt and unable to pay back their loan debt. The panel included Sens. Richard J. Durbin of Illinois, Jack Reed of Rhode Island, and Elizabeth A. Warren of Massachusetts, along with Reps. Steven I. Cohen of Tennessee, John Conyers of Michigan, Elijah E. Cummings of Maryland, and Hank C. Johnson of Georgia.

“Because federal law treats student debt as nondischargeable in bankruptcy proceedings, borrowers can be burdened with this debt for a lifetime even if circumstances make it unlikely that the borrower will ever be able to repay,” the members wrote in a letter to the Department of Education Secretary, Arne Duncan.
Under federal law, student loan borrowers cannot discharge their debt in bankruptcy unless they can demonstrate “undue hardship” in paying it back. Education Department contractors often block attempts to prove undue hardship by “aggressively challenging” borrowers’ claims of “undue hardship.”

The panel of Democrats is asking the Department of Education to create “clear standards” for borrowers to qualify for discharging their student-loan debt by stating:
“While we recognize the department’s prerogative to fairly collect on student-loan debts owed to it, we do not find it sensible or cost-effective for the department or its contractors to engage in lengthy legal challenges and appeals against bankrupt student-loan borrowers who have demonstrated a clear and legitimate inability to repay their loans.”

Among other recommendations was the request to clarify the criteria for “undue hardship” to include borrowers who receive disability benefits under the Social Security Act, if the secretary of veterans affairs has determined the borrower is unable to work because of a disability connected with military service, or if the borrower’s household income has been less than 175 percent of the official poverty guidelines during the five-year period before filing a bankruptcy petition.

The panel urged, “The need for action with respect to the student-loan-debt crisis is urgent. And, such guidance would bring consistency to the application of the undue-hardship standard while also enabling the department to focus its time and collection efforts on cases where there is a more-realistic opportunity for meaningful recovery.”