Student-loan borrowers should be able to achieve 'financial freedom' through bankruptcy, Elizabeth Warren says — especially with 'the looming threat of restarting' repayment

• Sen. Elizabeth Warren sent a letter to the Justice Department for an update on bankruptcy reforms for student-loan borrowers.

• In November, the DOJ updated guidance to make the bankruptcy process easier.

• Borrowers have to meet a difficult legal standard to get rid of their debt in court.

Massachusetts Sen. Elizabeth Warren wants to make sure bankruptcy is a viable option for student-loan borrowers who cannot pay off their debt.

In November, President Joe Biden's Education and Justice Departments released new guidance on the process for borrowers to get rid of their debt through bankruptcy. Leading up to the announcement, it was very difficult for student-loan borrowers to see success through that process because they had to prove the "undue hardship" standard, in which borrowers have to show that they cannot maintain a minimal standard of living, that their circumstances aren't likely to improve, and that they have made a good-faith effort to repay their debt.

The departments' new guidance reduced the burden of proof for borrowers by allowing them to complete self-attestation forms that the agencies will use to determine if the borrower meets the undue hardship requirements. This allows the Justice Department to recommend relief to a judge without having to go through time-consuming investigations, along with establishing more clear guidelines for debt discharge to ensure consistent treatment for all borrowers.

But it's been eight months since those reforms were announced, and Warren asked Attorney General Merrick Garland for a status update on implementation — especially with "the looming threat of restarting student loan payments" in October after an over three-year pause.

Warren wrote in a letter sent on Wednesday that the undue hardship standard "has been narrowly interpreted by courts, and has proven to be so difficult to meet that most borrowers do not even attempt to discharge their student loans through the bankruptcy process. Between 2015 and 2020, roughly 250,000 borrowers filed for bankruptcy annually. Of those, less than one percent saw their student loan debt discharged."

She added that "this updated guidance is designed to allow the DOJ and ED to facilitate the objective of more discharges and provide hope for borrowers seeking bankruptcy as a viable pathway to financial freedom."

Warren requested that by August 9, Garland provide information including how many borrowers have filed for bankruptcy discharge since the guidance was announced in November, how the Justice Department has informed attorneys about the new guidance, and the percentage of borrowers who filed for bankruptcy who actually had their loans discharged.

As Insider previously reported, Biden himself played a part in making the bankruptcy process more difficult for student-loan borrowers. As a senator, he supported the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, which expanded the undue hardship requirement to borrowers with private student loans. And prior to announcing the reforms, Federal Student Aid Director Richard Cordray acknowledged in 2021 that "the process doesn't work well. It needs to be reformed … and we're committed to doing that."

The Justice Department has not yet commented on updates to the bankruptcy process. As Warren said in her letter, though, millions of borrowers are resuming payments in the fall even after the Supreme Court struck down Biden's plan to cancel up to $20,000 in student debt for federal borrowers, meaning it's likely some borrowers will struggle to foot another monthly bill.

To ease the transition back into repayment, the Education Department announced a 12-month "on-ramp" period during which borrowers who miss payments will not be reported to credit agencies, but interest will still accrue during that time.

"I am concerned about a wave of harm to borrowers as payments restart, especially considering the recent findings from the Consumer Financial Protection Bureau (CFPB) that the delinquency rate for student loan borrowers is higher now than before the pandemic," Warren said in her letter. "The CFPB found that more than one in thirteen borrowers are falling behind on their other payment obligations and one in five borrowers have risk factors that indicate potential difficulties when payments resume, further exacerbating concerns about a spike in delinquencies and defaults once payments resume in the fall."

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