Update on Student Loan Forgiveness
Student loan forgiveness has been a highly-debated topic for the last few years, as the federal government under both former President Donald Trump and current President Joe Biden has initiated various programs to delay repayments or forgive outstanding debt altogether.
Since the onset of the COVID-19 pandemic four years ago, there have been many twists and turns in the student loan forgiveness saga, leaving many borrowers unsure of what the future will hold.
Even still, millions of student loan borrowers have been able to benefit from different executive actions that relaxed rules for eligibility, modified programs in existence and streamlined all application processes. Some modifications to repayment systems have allowed some student loan borrowers to save as well.
Borrowers struggling with student loan debt may be able to qualify for forgiveness through various federal programs. Those who don’t qualify may not have many options, as we’ll dive into further below.
Federal student loans
Last June, the Supreme Court struck down a plan by Biden that would’ve canceled billions of dollars of student loan debt. In the time since, the White House has been working hard to find new ways to bring borrowers relief.
In mid-February, the latest plan was announced that would do just that. The latest update on student loan forgiveness will see more than 150,000 borrowers qualify for the cancellation of nearly $1.2 billion in total student loan debt.
Those who qualify are eligible under the SAVE plan, which is a repayment program for federal student loan debt based around income. Borrowers who have lower balances — $12,000 or less — and also have made repayments for at least 10 years qualify to have the remaining debt wiped away.
In total, the Biden administration has now canceled almost $138 billion in federal student loan debt, benefitting nearly 3.9 million borrowers in the process.
Student loan borrowers seeking discharge
While this latest announcement is surely a welcome one for many borrowers, it still leaves many students without any relief at all. Those who don’t qualify for the loan forgiveness through the SAVE program don’t have nearly as many options for automatic and immediate relief.
It’s possible to seek discharge of student loan debt, but that’s a more complicated and complex process, as we’ll dive into further. There are other options to lower payments, though.
Student loan debt relief
Even if you aren’t eligible for complete forgiveness of your student loan debt, you can still take advantage of other plans to lower your monthly repayments.
The SAVE plan, as mentioned above, offers some borrowers the ability to lower their monthly payments based on their income — even if they don’t qualify for full forgiveness. This can provide some significant relief to those who need it.
It’s also possible to refinance student loans in much of the same way that other loans are refinanced. In this option, you would be replacing your old loan with a new one that has more favorable terms.
If you’re able to lower your interest rate, it could help to reduce your monthly payments. At the same time, if you refinance to a private loan servicer, you would lose any benefits that the federal government provides or may provide in the future.
It also may be possible to seek temporary deferment of repayment depending on your situation. If this is something you’d like to look into, it’s best to reach out to your loan servicer directly.
Student loans and bankruptcy
Until recently, getting student loans discharged through bankruptcy was a very difficult process. That’s because student loan debt is treated differently than other types of debt in bankruptcy proceedings.
In the 1970s, Congress passed legislation that put protections in place, because they were afraid that wealthy people would eventually abuse the system to get their student loan debt discharged.
This meant that in order to get student loans discharged through bankruptcy, a person had to sue the federal government and try to prove that the loan was causing them “undue hardship.”
That was a significant hurdle to overcome, not only because it was hard to prove the “undue hardship” but also because it was expensive to do so.
A law professor at Villanova University actually conducted a study in 2020 that found that only a little more than one in 1,000 people who declared bankruptcy and had student loans were able to get that debt discharged.
Approval for student loan discharges in bankruptcy
In November 2022, the Department of Education updated rules to make it easier for student loan debt to be discharged through bankruptcy. Now, borrowers who wish to have their student loan debt discharged through bankruptcy have to fill out a form that’s 15 pages long. Then, attorneys working for the government will use new guidelines on exactly what would qualify as “undue hardship.”
This has made the process simpler and more effective for borrowers. In fact, in November 2023, the DOE reported that 99% of people who used this new process were successful in getting their student loan debt discharged through bankruptcy.
While that only included a little more than 600 people total, the department believes an increasing number of these filings will be made in the future.
Final extension of the student loan repayment pause
During the COVID-19 pandemic, the federal government instituted a pause on all federal student loan repayments. That stood in place for more than three years, but came to an end in September 2023.
Interest began accruing again on September 1, while repayments resumed on October 1.
When the payments were put on pause, interest rates were dropped to 0% as well, so that debt wouldn’t continue to rack up as borrowers didn’t make payments. Once those payments resumed, the interest rates returned to whatever their fixed rate was.
There is a 12-month “on-ramp” as part of this resumption of payments, though. Through September 30, 2024, borrowers who aren’t able to make repayments won’t default on their loans. However, interest still accrues if payments aren’t made, adding to the total outstanding debt.
This has caused many borrowers to be faced with the daunting challenge of fitting student loan repayments back onto their already tight budgets.
Challenges for borrowers seeking loan forgiveness through bankruptcy
While the Department of Education has made it easier for borrowers to seek loan forgiveness through bankruptcy, it’s still not as straightforward as having credit card debt discharged. It’s not an automatic that this debt will be forgiven. The federal government still needs to agree that the loan is causing “undue hardship,” even if the guidelines by which they make that decision have been relaxed.
That’s why it’s important to work with an experienced bankruptcy law firm if you have student loan debt that you wish to discharge. Babi Legal has a team of experienced professionals who can help you navigate the complicated web of student loan debt forgiveness, giving you a better chance of having it discharged through bankruptcy.
Further student loan forgiveness reading
Babi Legal has provided additional reading on student loan forgiveness for you to review, including the impact of bankruptcy on student loans, and the pros and cons of student loan forbearance.
