The Department of Education Can Help With Student Loans in Bankruptcy

With the Second Circuit's decision last week regarding private student loans, student loan discharge in bankruptcy is in the news. As Slipster Adam Levitin blogged, the "big picture" effect of this decision--and the 5th and 10th Circuits--is unclear. They could affect a broad swath of private student loans and they possibly could bring more bankruptcy filings to deal with a portion of people's student loan debt. Regardless, though, federal student loans remain presumptively non-dischargeable.

If the people who file bankruptcy with both private and federal student loans (which, I suspect, likely is many people with student loans), debtors will need to bring undue hardship discharge requests. A possible additional effect of these decisions may be to increase undue hardship requests, provided that debtors and attorneys think they are worth making. Research by Jason Iuliano (Utah Law) suggests that debtors may be more successful in these actions than the general public or even many consumer bankruptcy attorneys presume.

For federal students loans, the Department of Education plays a crucial role in undue hardship discharge requests. I recently published an essay in Minnesota Law Review Headnotes, co-authored with Aaron Ament and Daniel Zibel, who co-founded the National Student Legal Defense Network, regarding how the Ed Department should update its internal guidance for determining whether to contest a borrower’s request for an undue hardship discharge. The Ed Department presently seems to be wasting resources going after debtors with little ability to repay, regardless of whether their student loans are discharged. In the essay, we provide two options for how the Department can update its approach to bankruptcies to ensure that it calibrates its actions to make the promise of a fresh start more real for student borrowers.

Our first suggestion is the simplest. The Ed Department should stop objecting to undue hardship requests in all cases. We think this is justified based on the financial profiles of the people who file bankruptcy, the costs and other hurdles of bankruptcy filings, and the other checks within the bankruptcy system. This presumptive position also can be easily reversed by the Ed Department if it sees a significant rise in undue hardship requests for student loans that it thinks actually will yield monetary recovery when compared to the costs of objecting to the discharge.

Our second suggestion is more complex and sets forth decision steps and criteria for the Ed Department to assess to determine whether to consent to or to contest a student loan discharge request. The second suggestion, in particular, draws significantly from prior work, much of which was in response to and inspired by the Department of Education's request for information (RFI) from 2018 about changing its guidance regarding undue hardship student loan discharges--such as a response submitted by Slipster Dalié Jiménez and myself, along with a large group of bankruptcy and consumer credit scholars. Not only has the Department of Education not acted on this RFI, but also the RFI is holding up undue hardship proceedings, including reaching the Supreme Court. The Attorney General of the United States cited the RFI as a reason that the Supreme Court should reject a writ of certiorari in McCoy v. United States, arguing that review was not warranted “[b]ecause the Department [] continues to study this issue, and may revise its regulations and related policies in the future.” (The writ was rejected.) Student loans remain on the political and regulatory radar. In short, now is the time for the Ed Department to update its policies regarding student loan discharge.