Education, Justice Depts. reconsidering stance on fighting student loan borrowers in bankruptcy
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The Education Department's point person on student financial aid told Congress Wednesday that the agency is working with the Justice Department to revise its bankruptcy policy for federal student loans.
"The process doesn't work well. It needs to be reformed . . . and we're committed to doing that," Richard Cordray, chief operating officer of the Office of Federal Student Aid, told a House education subcommittee Wednesday. "There have been discussions already with the Justice Department. They, too, are willing to have us revise our approach."
Discharging education debt through bankruptcy can be a Sisyphean task. Borrowers must bring a separate lawsuit - known as an adversary proceeding - within their bankruptcy case to have their student loans canceled. They must persuade the court the debt would impose an "undue hardship" and fend off the lender from thwarting their effort.
As the creditor for $1.6 trillion in federal student loans, the Education Department has the right to contest a bankruptcy discharge to maintain the fiscal integrity of the lending program, and it routinely does so. But the agency also has an obligation to help destitute borrowers, consumer groups argue.
Rep. Adriano Espaillat, D-N.Y., raised the issue of the department's power in bankruptcy proceedings during Wednesday's hearing on the policy priorities of the Federal Student Aid office. He asked whether the agency had plans to change how it determines which bankruptcy requests to contest or to better define what constitutes undue hardship.
"While there are statutory limitations that can and should be changed," Espaillat said, "the department could also take steps to reduce the burden on borrowers who are already struggling financially to make it easier on them to secure relief."
Consumer advocates have been critical of the Biden administration for continuing what many say is a restrictive policy and for what they call unreasonable demands on distressed borrowers to repay their debts.
In July, The Washington Post reviewed dozens of bankruptcy cases involving federal student loans and found that department lawyers were asking borrowers to take on multiple jobs, seek child support to free up money or have their children find work to pay off their loans. At the time, the Education Department said it would review its policy, an effort that Cordray said is nearing completion.
"We're in the process . . . and will have more to say . . . fairly soon," he said. "It is a somewhat complex issue, as bankruptcy always is, and there are competing considerations. But we think there is more we can do to reform that process."
The Education Department did not immediately respond to requests for further comment on a timeline for the reforms.
This is not the first time the agency has given a second thought to the bankruptcy policy. In 2018, the Education Department asked the public for feedback on whether updates were needed. The agency questioned whether borrowers were being discouraged from seeking help because its standard was too prohibitive.
Legal experts have said the department could set thresholds for a bankruptcy discharge. A recent paper exploring the policy suggested the federal agency could stand down if more than half of a person's income were derived from Social Security or disability payments, or if their household earnings had been far below federal poverty guidelines for several years.
Ultimately, while the Education Department could clarify its definition of undue hardship, a monumental shift in the treatment of student loans in bankruptcy would require congressional action.
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