March 07, 2018

The Trump Administration Looks at Bankruptcy Options for Student Loan Borrowers

In February of 2018, President Trump released his budget proposal for the 2019 fiscal year, which included some potential big changes to income-driven repayment plans and student loan forgiveness. Yet, while borrowers were still figuring out the details of what Trump’s 2019 budget means for the future of student loans, the Trump administration said it […]

In February of 2018, President Trump released his budget proposal for the 2019 fiscal year, which included some potential big changes to income-driven repayment plans and student loan forgiveness.

Yet, while borrowers were still figuring out the details of what Trump’s 2019 budget means for the future of student loans, the Trump administration said it would also begin reviewing the way student loan discharges work – particularly in the event of a bankruptcy.

Student Loan Bankruptcy Today

Between 1978 and 2005, Congress made numerous changes to the bankruptcy code that had a big impact on student loan borrowers. These changes were part of a broad initiative that sought to tackle the growing debt challenges America was facing as a result of borrowers who couldn’t repay student loans after college.

Once Congress was finished, filing for bankruptcy became a hot button issue for borrowers, as they no longer could claim student loans as part of their debt unless repaying these loans would cause an “undue hardship”. However, because these hardships had never been properly defined, most courts wouldn’t allow student debts to be discharged, except for those few cases that could be proven under what came to be known as the Brunner Test.

What is the Brunner Test?

The Brunner Test is a three-part test used by most courts to determine whether a borrower meets the requirements for “undue hardship” and can have their student loans discharged through bankruptcy.

Under the Brunner Test, requirements for student loan borrowers seeking bankruptcy include:

  • Inability to maintain, based on current income and expenses, a minimal or acceptable standard of living for the borrower and their dependents if they are forced to repay their existing loans
  • Other issues or circumstances that will continue throughout a significant portion of a borrower’s repayment period that would affect repayment of these loans
  • An effort to make good faith payments towards any outstanding student loans that already exist

What complicates this issue, however, is the fact that borrowers hoping to have their student debts discharged in court must file a separate lawsuit as part of their bankruptcy case to prove this undue hardship. So, for those who are already struggling to make their student loan payments, this adds more legal costs to an already expensive bankruptcy proceeding.

Additionally, while the Brunner Test is used by most jurisdictions during bankruptcies that involve student debt, the undue hardship standard can vary from one state to another, and even one city to another, which makes things even more complicated for struggling borrowers.

Trump on Student Loans and Bankruptcy

Coming on the heels of Trump’s budget proposal, the Department of Education circulated a memo last week that asked for public comment on the things loan holders, which include both private and federal lenders, should consider when it comes to student debts during bankruptcy proceedings.

By asking for public option, the White House hinted at a potential upcoming shift in how the federal government views student debt in relation to bankruptcy, and may be a signal that big changes are on the way.

Over the last several years, Democrats like Senator Elizabeth Warren have been fighting on behalf of student loan borrowers who have historically been turned away from bankruptcy as an answer to mounting student debt. Now with the Department of Education looking for a new solution, there’s a chance that bipartisan cooperation on this issue could take hold, and bankruptcy laws could be loosened.

Whether this happens or not depends on several factors, including the public’s opinion on the issue of student debt and how it should be handled, and the government’s willingness to address the problem in bipartisan fashion for good.

Speaking on the subject, the senior director of postsecondary education at the Center of American Progress said, “There’s been press in the past about how the Department of Education is unbelievably aggressive pursuing bankruptcy claims and maybe the agency wants to take a step back and ask whether that level of aggressiveness is worthwhile. [But] there is a risk that they could make it even more restrictive than it is today.”

Where We Go From Here

As of September 2017, about 4.6 million student loan borrowers are in default on their loans, which is much higher than in previous years. But with an average balance of $34,144 in debt, which itself is up over 60 percent in the past decade, more borrowers are expected to be added to this number in the coming years – especially as outstanding balances grow beyond their all-time high of $1.4 trillion.

For any changes to take place in the next year or more, it will take a consolidated effort from the public, lawmakers and the White House. To voice your opinion on the matter, please visit this page and leave a comment with your own thoughts and experiences. You can also get more information on the memo here.

If you’d like to speak with a specialist about student loan discharges or get more info on Trump’s education policies and how they’ll affect you, fill out our free online form or call (800) 771-6358 now to speak with an expert.