Biden administration reconsidering stance on federal student loans in bankruptcy

A top Federal Student Aid (FSA) official said the Biden administration is reviewing the Education Department's stance on how to handle federal loans for borrowers who declare bankruptcy. (iStock)

The Biden administration is working to amend the Education Department's policy about federal student loans in bankruptcy, a top-ranking official told Congress.

"We are going to review that aggressively… we'll have more to say about that hopefully fairly soon," Richard Cordray, chief operating officer at the office of Federal Student Aid (FSA), said at the Oct. 27 hearing. "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."

This development comes months after the Senate Judiciary Committee discussed a bipartisan bill, The FRESH START Through Bankruptcy Act of 2021, which would make federal student loans eligible for discharge in bankruptcy after 10 years of making payments.

However, because bankruptcy has enduring negative financial consequences, it may be worthwhile to also look into alternatives like private student loan refinancing. If you decide to refinance your student loan debt, visit Credible to compare interest rates without impacting your credit score.

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Student loan discharge through bankruptcy is hard to achieve

During the hearing hosted by the House Committee on Education and Labor, Rep. Adriano Espaillat (D-N.Y.) raised concerns about how the department currently handles federal student debt in bankruptcy proceedings. In order to have federal loans discharged, debtors must prove that the debt would cause "undue hardship" if it were to be collected.

"While there are statutory limitations that can and should be changed, 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 under bankruptcy proceedings," Espaillat said.

The congressman then asked Cordray what the administration is doing to make it easier for borrowers to have their federal loans discharged in bankruptcy. Cordray said that there have been discussions about bankruptcy reform between the Education Department and the Justice Department.

"We think that there's more we can do to reform that process, and we are committed to doing it."
- Richard Cordray, FSA COO

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Cordray suggested that there should be an alternative to help borrowers who "are forced to go into court, if you can imagine that, and recount how miserable their lives are in order to beg for some kind of bankruptcy relief and rarely get it."

He added that bankruptcy court isn't the right place to request that type of relief, and it doesn't offer the best outcomes for borrowers who are unable to repay their federal student debt. Additionally, seeking student loan relief through bankruptcy has its drawbacks.

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Consequences of filing for bankruptcy

While filing for bankruptcy may be a good option for seriously delinquent borrowers who are struggling to repay their student loans, it comes with serious consequences.

Bankruptcy leaves a long-lasting blemish on your credit report that can make it difficult to qualify for other financial products like mortgages, auto loans and credit cards. Depending on the chapter of bankruptcy you file, you may also be forced to liquidize assets such as second homes, investments like a stock portfolio and even checking or savings accounts.

Additionally, filing for bankruptcy on student loans is a time-consuming and costly process that's carried out through the courts. Once the case is filed, the documents are considered public record. For student loan borrowers who want to avoid going into bankruptcy, student loan refinancing can be a more straightforward alternative.

Browse student loan rates from real private lenders in the table below, and visit Credible to see refinancing offers tailored to you. This way, you can decide if a new student loan repayment plan can keep you from filing for bankruptcy.

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Should you refinance your student loans?

With no tangible results on bankruptcy reform yet, federal student loan borrowers may be considering refinancing their loans as the COVID-19 administrative forbearance period comes to an end in January 2022. Refinancing to private student loans may help you secure a lower rate on your student debt, which can reduce your monthly payments.

A recent Credible analysis found that well-qualified borrowers who refinanced their student debt to a longer loan term were able to reduce their monthly payments by more than $250, all without adding to the total cost of interest.

Keep in mind that refinancing your federal loans into a private loan would make you ineligible for certain programs like income-driven repayment plans and student loan forgiveness measures like Public Service Loan Forgiveness (PSLF).

To decide if student loan refinancing is right for you, see your estimated interest rates for free on Credible. Then, use a student loan refinance calculator to view your potential repayment terms.

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