Damircudic | E+ | Getty Images
More federal student loan borrowers have been able to get their debt discharged in bankruptcy over the last few years, thanks to new guidance that the Biden administration has issued.
That more lenient policy may be at risk when President-elect Donald Trump enters the White House in January, experts say.
Here’s what borrowers need to know.
‘A tightening in the approach of relief’
When the Trump administration takes over, “I suspect we’ll see a tightening in the approach of the relief,” said Malissa Giles, a consumer bankruptcy attorney in Virginia.
As a result, Giles said she plans to be “a little more conservative” with the clients she recommends pursue bankruptcy for their student debt.
“We’re probably not filing those cases that are a bigger ask right now,” Giles said. “I don’t want people to spend their money on it, when it may not come through.”
More from Personal Finance:
Here are the last days to ship a holiday package
Why those traveling to Europe may find bargains in 2025
Applying this ‘$1 rule’ is secret to guilt-free shopping
Higher education expert Mark Kantrowitz also expects to see a reversal in the approach.
“The Trump Administration is likely to rescind this guidance,” Kantrowitz said, referring to the Biden administration’s looser rules for student loan borrowers in bankruptcy.
Latife Neu, a bankruptcy lawyer in Seattle, said she wasn’t sure bankruptcy would necessarily become more difficult for student loan borrowers under Trump.
“There is a surprising amount of consensus across the political spectrum,” Neu said, that the higher bar for student loan borrowers to get their debt discharged in bankruptcy is “a defective policy.”
The Trump transition team did not immediately respond to a CNBC’s request for comment .
How bankruptcy got easier for student loan borrowers
In the fall of 2022, the U.S. Department of Education and the U.S. Department of Justice released updated bankruptcy guidelines to make it easier for struggling borrowers to get their student loans erased in court.
Previously, it was difficult, if not impossible, for people to part with their education debt in a normal bankruptcy proceeding.
In the 1970s, lawmakers added a stipulation that student loan borrowers needed to wait at least five years after they began repayment to file for bankruptcy. Policymakers and pundits had raised concerns that students would rack up a bunch of debt and then try to get rid of it after graduation.
The waiting period was upped to seven years in 1990. The rules changed yet again almost a decade later, so that only people who proved that their student debt posed an “undue hardship” could discharge it.
Congress, however, never spelled out what that term means, and lawyers and advocates say the uncertainty led to unfairness in the courts.
The Biden administration’s recent approach treats student loans more like other types of debt in bankruptcy court, experts say. Borrowers are able to fill out a 15-page form, detailing their financial struggles and making their case for a mulligan.
In the first 10 months of the new policy, student loan borrowers filed more than 630 bankruptcy cases, a “significant increase” from recent years, the Biden administration said in a statement at the time.
“The vast majority of borrowers seeking discharge have received full or partial discharges,” it said.
Source link
