White House Proposes Bankruptcy Discharge for Student Loans

The Administration is considering allowing more Americans to erase student debt in bankruptcy according to an article in the Wall Street Journal.  Current law does not allow the discharging of student debt in bankruptcy court unless they prove to a judge's satisfaction that they face an "undue hardship", which, according to the article is  such a stringent standard that few borrowers even try" to discharge their loans via bankruptcy. Though the administration can't change the law without congressional approval, it can influence how aggressively to fight a borrower’s request to cancel loans in court. The article points out that "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."

On Tuesday, the Department of Education said it would "seek public input on whether the government should clarify when borrowers can discharge loans," a sign that, according to the Journal, the government might ease its stance. The agency pointed to concerns that many student borrowers are being "inadvertently discouraged" from requesting cancellations or receiving unequal treatment from judges who use two prevailing methods to define hardship.

SFIG will monitor developments on this proposal and convene committee discussions as necessary to address potential impact to Student Loan ABS. If you would like to join the Student Loan Issuer Committee, please email Michael.Williams@sfindustry.org.

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