While some progressive Democrats continue to push the president to cancel student loan debt, there's a bipartisan effort underway to overhaul the student loan system in another way: by making bankruptcy discharges more accessible for student debtors.
Senate Majority Whip Dick Durbin (D-IL), who chairs the Senate Judiciary Committee, and Senator John Cornyn (R-TX) announced a new bill called the "FRESH START Through Bankruptcy Act of 2021" last week to better enable borrowers to seek a student loan discharge in bankruptcy.
"Student loan debt follows you to your grave," Durbin stated. "Our bipartisan bill finally gives student borrowers — some who were misled into taking out costly loans by predatory for-profit colleges — a chance to get back on their feet when they have no other realistic path to repay their loans."
If passed, the bill would allow federal student loans to become eligible for discharge in bankruptcy proceedings 10 years after the borrower's first loan payment comes due. (Borrowers with loans less than 10 years old would have to go through the current process.)
Jason Iuliano, associate professor of law at the University of Utah and an expert on student loan bankruptcy law, told Yahoo Finance that the bill's 10-year waiting period was noteworthy.
"First, it would ensure that people who have struggled to repay their student loans for at least a decade can benefit from bankruptcy’s fresh start and get their lives back on track," Iuliano said. "And second, it would ensure that the student loan credit market continues to function."
The bill also proposes to increase "institutional accountability" by making colleges that receive federal loans from more than a third of their students "partially reimburse" the Department of Education (ED) if student loans are later discharged in bankruptcy or "if the colleges had consistently high default rates and low repayment rates."
"This is an excellent proposal that would help align schools’ incentives with their students’ incentives," Iuliano explained. "Instead of engaging in an ever-increasing tuition arms race, underperforming schools would be forced to cut tuition or improve employment prospects for their students."
Roughly 45 million Americans hold more than $1.7 trillion in federally-backed student loan debt
Student loan bankruptcy discharge
Discharging student loans through bankruptcy, while difficult, is not impossible.
That said, there was an era when it was a much easier process.
"Before 1976, student loans were treated like other types of unsecured debt bankruptcy. If you were facing financial ruin, you could get relief," Durbin explained. "But then Congress got the idea that student borrowers were running to bankruptcy court, right after graduation. This notion was based on more anecdote than data. Congress started passing laws to make it harder."
Over time, the bankruptcy code became more restrictive for all student debtors.
In most personal bankruptcy cases involving student debt, a judge now applies the Brunner test — a three-pronged test applied to student loan borrowers who filed adversary proceedings seeking to discharge educational debt — to determine if specific student loans caused a borrower to suffer undue hardship.
"Starting with the 1987 case called Brunner, courts have interpreted the phrase to set an impossibly high bar for relief," Durbin said. "To pass the Brunner test of undue hardship, you have to convince a bankruptcy judge that it’s hopeless that you’d ever repay, while the Department of Education or its guaranty agencies are on the other side arguing against you."
While Durbin went on to stress that "proving undue hardship is nearly impossible," Iuliano disagreed.
The impossibility of proving undue hardship specifically "is not the case," Iuliano said. Based on his research of bankruptcy cases, an estimated "60% of people who attempt to discharge their student loans in bankruptcy are successful."
'This is the first time it’s been bipartisan'
Forced to choose between student loan forgiveness — favored by some prominent Democrats but taboo to most Republicans — and bankruptcy reform, many Republicans opted for the latter during the hearing.
"While I don't support cancellation of all student debt... I can't think of very many good reasons to keep students with massive amounts of debts as lifelong serfs of banks and lifelong serfs of universities by not allowing them to discharge a bankruptcy of their debt under appropriate circumstances," Sen. Josh Hawley (R-MO) said during the hearing, adding that the bipartisan bill was "a very sensible approach."
Sen. Elizabeth Warren (D-MA), a leading proponent of student loan cancellation, previously told Yahoo Finance that the U.S. bankruptcy system is "fundamentally wrong" on student debt discharges.
"I’ve been introducing student loan bankruptcy [bills] for a long time," Durbin said during the hearing. "This is the first time it’s been bipartisan. With this bill, we see a growing bipartisan consensus that the status quo isn’t working, and that we need student loan bankruptcy reform
One appealing aspect of the bill, according to Iuliano, is that the legislation addresses the fundamental issue of tuition inflation by making schools reimburse the federal government when students discharge their loans via bankruptcy.
"Schools are... selling a product for a price, and that price needs to match what these students get out of it," said Cornyn, one of the co-sponsors. "That's why the second part of the [bill] creates a limited risk-sharing framework for schools but enough students default on their loans, and fail to continue to repay them."
Coryn added that some schools have "taken advantage of the American taxpayer for too long, and the students are the ones harmed by their excess, so I'm glad to see this bill introduced today."
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Pelosi's softness on canceling student debt has 80 progressive organizations 'disappointed'
Ayelet Sheffey
Thu, August 12, 2021
House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer speak outside the White House on January 9. AP Photo/Susan Walsh
Nancy Pelosi recently said Biden does not have the authority to cancel $50,000 in student debt.
80 organizations responded to her comments in a letter explaining why Biden does have that authority.
Pelosi's comments contrasted Schumer's views, who has been a leader in urging debt cancellation.
Last month, Speaker of the House Nancy Pelosi broke with many of her Democratic colleagues when she told reporters that President Joe Biden does not have the power to cancel student debt.
"People think that the president of the United States has the power for debt forgiveness. He does not," Pelosi said. "He can postpone, he can delay, but he does not have that power."
In saying so, Pelosi undercut the hopes of many progressives for massive student-debt cancellation, especially Sen. Elizabeth Warren and Senate Majority Leader Chuck Schumer, who have made that the core of their argument that Biden should cancel $50,000 per person. Progressive organizations are angry - 80 of them, at least.
The Student Debt Crisis, which advocates for student debt cancellation, led labor unions, civil rights groups, and more in writing a letter to Pelosi pushing back on her comments. They cited the Higher Education Act as the authority Biden has to cancel student debt, adding that the authority both President Donald Trump and Biden used to extend the pause on student-loan payments during the pandemic is the same authority that can be used for widescale debt cancellation.
"In addition, we were disappointed to hear you raise broader concerns about debt cancellation," the letter said to Pelosi. "Student debt cancellation doesn't simply aid the 44 million federal student loan borrowers who would benefit from this critical relief. It also benefits their families and neighborhoods. Indeed, all of America would benefit."
The letter cited a study from the Roosevelt Institute that analyzed Warren and Chuck's Schumer's $50,000 in student-debt cancellation proposal, in which it found the cancellation would be progressive, rather than regressive, meaning low-income borrowers would benefit more.
The racial impact of student-debt cancellation would also be significant, the letter said. Insider reported in April that 36 civil rights organizations released civil-rights principles detailing the benefits that student-debt cancellation would have on Black borrowers. The organizations, including the NAACP, wrote that Black borrowers typically owe 50% more student debt than white borrowers, and four years later, Black borrowers owe 100% more.
While Pelosi initially told reporters that student debt cancellation has to be "an act of Congress," a member of her staff later clarified her comments, saying that the speaker would support Biden "using any authority he believes he has to address the crisis of student debt in our country."
Still, Pelosi's comments came as a shock given that her counterpart in the Senate, Schumer, has been a leader on student-debt cancellation efforts. The Intercept reported last week that Pelosi's comments came after a memo circulated from Democratic megadonors Steven and Mary Swig - who gave maximum contributions to Pelosi - claiming that Biden cancelling debt is illegal.
But progressives are remaining consistent with their messaging that Biden can legally cancel $50,000 in student debt immediately by signing an executive order.
"The president has the power to cancel $50,000 in student loan debt right now," Warren told previously Insider. "Sen. Schumer and I are going to continue to push for this, but Biden doesn't need any authorization from Congress. He needs to pick up the pen and do it himself."
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