Education Dept. Is Urged to Clarify Policy on Student-Loan Bankruptcies

May 19, 2014

Seven Democratic members of Congress are pushing for clarity and lenience in how the Department of Education and its contractors forgive student-loan borrowers who are bankrupt and unable to pay back their loan debt.

"Because federal law treats student debt as nondischargeable in bankruptcy proceedings, borrowers can be burdened with this debt for a lifetime even if circumstances make it unlikely that the borrower will ever be able to repay," the members wrote on Friday in a letter to the education secretary, Arne Duncan.

Under federal law, student-loan borrowers are unable to discharge their debt in bankruptcy unless they can demonstrate "undue hardship" in paying it back. Education Department contractors often block attempts to prove undue hardship, the letter argues, by "aggressively challenging" borrowers’ claims that they are unable to make payments.

According to the letter, the department should create "clear standards" for borrowers to qualify for discharging their student-loan debt.

"While we recognize the department’s prerogative to fairly collect on student-loan debts owed to it, we do not find it sensible or cost-effective for the department or its contractors to engage in lengthy legal challenges and appeals against bankrupt student-loan borrowers who have demonstrated a clear and legitimate inability to repay their loans," the letter says.

Signing the letter were Sens. Richard J. Durbin of Illinois, Jack Reed of Rhode Island, and Elizabeth A. Warren of Massachusetts, along with Reps. Steven I. Cohen of Tennessee, John Conyers of Michigan, Elijah E. Cummings of Maryland, and Hank C. Johnson of Georgia.

Among other recommendations in the letter were clarifying the criteria for "undue hardship" to include borrowers who receive disability benefits under the Social Security Act, if the secretary of veterans affairs has determined the borrower is unable to work because of a disability connected with military service, or if the borrower’s household income has been less than 175 percent of the official poverty guidelines during the five-year period before filing a bankruptcy petition.

"The need for action with respect to the student-loan-debt crisis is urgent," the letter says. "Such guidance would bring consistency to the application of the undue-hardship standard while also enabling the department to focus its time and collection efforts on cases where there is a more-realistic opportunity for meaningful recovery."