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  • Carl Rolsma

Will Student Loans Become Easier to Discharge in the Near Future?

The Department of Justice recently announced a new process for handling cases in which individuals seek to discharge their federal student loans in bankruptcy. The DOJ's stated goal is “to ensure consistent treatment of the discharge of federal student loans, reduce the burden on borrowers of pursuing such proceedings and make it easier to identify cases where discharge is appropriate.”

In their press release the difficulty of overcoming the “undue hardship” standard for student loan discharge and the role of the bankruptcy judge in making the final decision in conceded, but under the new process the DOJ's lawyers would be better able to “recommend discharge to the judge without unnecessarily burdensome and time-consuming investigations. The new process will also help borrowers who did not think they could get relief through bankruptcy more easily identify whether they meet the criteria to seek a discharge.”

The undue hardship test considers “the borrower’s past, present and future financial circumstances.” Under the new process the DOJ will review information provided by the Debtor and the Department of Education and “apply the factors that courts consider relevant to the undue-hardship inquiry and determine whether to recommend that the bankruptcy judge discharge the borrower’s student loan debt.”

The process to get a federal student loan discharged in a bankruptcy starts with the filing of a lawsuit by the Debtor in the bankruptcy court against the Department of Education. A government attorney is assigned to the case and in the past often seemed to take a default position of opposing the discharge.

My reading between the lines is that the DOJ seems to be indicating that they will be making an effort to make it easier to get some student loans discharged. Instead of seeming to take a default position of almost always opposing federal student loan discharges, they will be more likely to recommend discharge than they have in the past. However, bankruptcy judges could continue to use a strict interpretation of the "undue hardship" standard and rule against discharge as readily as they have in the past.

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