July 12, 2024

Navigating the Student Loan Maze: A Rise in Bankruptcies as Borrowers Seek Relief

Image Credits: Paras Griffin/Getty Images

In a surprising turn of events, many Americans opt for bankruptcy as a lifeline to escape the clutches of student loan debt. The Department of Justice recently revealed that 632 borrowers took this route between November and September, marking a notable increase from pre-pandemic levels, which averaged around 480 annually.

What makes this spike particularly significant is its occurrence despite the pandemic-era freeze on federal student loan payments in place since March 2020. With the pause officially lifted at the start of October, millions of Americans face a potential financial shock.

According to the latest Federal Reserve data, the average monthly student loan bill ranges from $200 to $299 per person, with some borrowers facing even higher amounts. Collectively, borrowers are now expected to resume payments totaling around $10 billion per month, as estimated by JPMorgan.

“The departments anticipate that this trend will continue,” warns the Justice Department in a recent release.

This surge in bankruptcy filings comes a year after the Biden administration introduced a new legal pathway, streamlining the process for discharging federal student loan debt in bankruptcy. Updated guidelines from the Justice and Education departments, implemented in November 2022, aim to simplify the government’s decision-making process without burdening borrowers with lengthy investigations.

Previously, Congress had set a higher bar for discharging student loan debt than other types of debt, such as medical or credit card debt. Borrowers were required to demonstrate “undue hardship.” Now, the criteria include proving the inability to repay the loan currently, failing to repay it in the future, and having made a good-faith effort to repay the loan.

The government’s latest data on loan discharges suggests that the rule change has made it easier for eligible borrowers to achieve a bankruptcy discharge of their federal student loan debts.

“One year ago, we set out to simplify and improve the process for student loan borrowers in bankruptcy,” says Associate Attorney General Vanita Gupta. “Our one-year review indicates that our efforts have made a real difference in borrowers’ lives by ensuring student-loan discharges are more accessible to eligible borrowers.”

This policy shift aligns with President Biden’s broader efforts to alleviate Americans’ student loan debt burden. Although the Supreme Court struck down Biden’s student loan forgiveness plan earlier this year, which aimed to erase up to $20,000 in loans per borrower, the administration continues to pursue other avenues. Recently, the White House announced plans to erase $127 billion of debt owed by approximately 3.6 million borrowers, emphasizing a commitment to addressing the ongoing student loan crisis.

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