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Could bankruptcy become an avenue to student loan debt relief?

If you’re one of the millions of Americans struggling with student loan debt, you may soon be eligible for financial relief. The White House announced this week that it’s considering new pathways to enable individuals to cancel student debt through bankruptcy.

While the details of the proposal have not yet been released—and some bankruptcy experts contend that the current standards leave little room for change—the news is promising to many recent graduates facing insurmountable debt.

Current regulations

Since the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005, student loan borrowers have been prohibited from filing bankruptcy unless they could prove “undue hardship.” However, the law did not explicitly define what constitutes undue hardship. Consequently, the term has been open to the subjective interpretation of the courts.

In addition, when a student loan borrower does file bankruptcy under this clause, Department of Education contractors and debtholders often litigate forcefully against such efforts. These lawsuits have created a major obstacle to the success of any such bankruptcy case.

New path forward?

The question lawmakers must now contend with is how to redefine the current bankruptcy standards. The goal is to provide debt relief—to the greatest extent possible—to those borrowers who can’t pay and won’t be able to pay for many years to come. However, if lawmakers broaden the standards too much, it could significantly raise the price of the federal student loan program. Currently, loan forgiveness programs and income-based repayment plans already have the student loan program on the brink of losing money.

While many questions remain to be answered surrounding how and when the proposed bankruptcy reform may be enacted, it is nonetheless a hopeful sign to student loan borrowers whose lives could dramatically benefit from bankruptcy.

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