Trump Admin Considers Erasing Student Loan Debt in Bankruptcy

In December, it was reported by the Wall Street Journal that 4.6 million Americans are behind on their federal student loan payments. The total student debt is now at $1.4 trillion, which is more than double it was a decade ago. 

With that in mind, the Trump Administration announced this week that it is considering changing a current federal law that makes it difficult for those filing for bankruptcy to erase their student loan debt. 

“A decades-old federal law prevents Americans from discharging student debt in bankruptcy court unless they prove to a judge’s satisfaction that they face an “undue hardship,” such a stringent standard that few borrowers even try,” writes the WSJ. “The Trump administration can’t change the law without congressional approval. But it can decide how aggressively to fight a borrower’s request to cancel loans in court. The government, the nation’s primary student lender, has traditionally fought such efforts, since any failure to repay loans comes at a cost to taxpayers.” 

The 1976 law requires borrowers to prove in court that they have experienced an “undue hardship” to get their student loan debt erased, but Congress has never defined the term.  

These cases have been settled based on what the judges perceived the term to mean. There have been very few cases where borrowers’ student loans were expunged in their bankruptcy claims. 

WSJ reports that only 500 individuals out of the 766,000 bankruptcy cases were able to erase these loans last year. Not to mention, these cases can be expensive since they are often over a span of a few years. Also, the majority of those filing can’t afford sophisticated representation. 

On Tuesday, the Education Department announced that it would take into account the public’s input on if the policy needs a change.  

Student advocates have been lobbying to change the law to better protect borrowers for years. 

“The department will review the data collected to determine whether there is any need to modify how undue-hardship claims by student loan borrowers in bankruptcy are evaluated,” said the Education Department. 

However, this could make it more difficult for Americans to borrow and would evidently make it even more difficult for the Department of Education to collect the debt owed. 

“The Education Department already struggles to collect on student debt and recent reports suggest that government lending to college and graduate students could soon become an immense drain on federal coffers. As of Sept. 30, 22% of Americans with federal student loans hadn’t made a payment in at least a year,” writes WSJ.

The costs for universities and college are at an all-time high and the majority of Americans take out loans to help cover these expenses. 

The Trump Administration is aiming to cut the significant federal funding that is being funneled into student loans in the latest proposed budget plan.  

This plan would increase monthly payments, but reduce the length of time to get loan forgiveness– along with eliminating the Public Service Loan Forgiveness Program for those working full-time in qualifying public service positions. The budget also proposed to put an end to subsidized student loans. This would mean the interest would start accruing once the loans were taken out versus after they finish school.

While the current federal loan program will cost taxpayers $170 billion over the next ten years.

Author’s note: Although we can understand that those filing bankruptcy are in a dire position, this can’t be solved without giving away taxpayers’ money.  Unfortunately, the student loan program has encouraged much higher tuitions at universities. Student often have difficulty realizing what burden this will be when they graduate. Also, the schools don’t worry about what the students can pay, since they can always get loans.