WASHINGTON–A new bill in the Senate seeks to overhaul student loan discharge in bankruptcy rules.
The bill, introduced by senators Dick Durbin (D-IL) and John Cornyn (R-TX), made its debut during a Senate Judiciary Committee meeting over how student loans are handled during bankruptcy proceedings. Student loans currently can’t be discharged in bankruptcy except in cases of undue hardship—a term that has no set definition and is up to the courts to decide, legal analysts have noted.
“Most borrowers are unsuccessful in their appeals to include their student loans in bankruptcy,” reported Forbes. “But a new bipartisan bill aims to change that—and overhaul the student loan system in its entirety.”
The Fresh Start Through Bankruptcy Act would allow student loan borrowers to discharge federal student loans after a 10-year waiting period. Colleges with more than one-third of their students receiving federal student loans would be required to partially refund the government if the students’ loans are later discharged in bankruptcy, under the legislation’s wording.
Bipartisan Effort
Durbin, who has introduced and co-sponsored student loan reform bills in the past, noted that this would be the first bipartisan effort to reform the bankruptcy rules, Forbes added.
“We made a mistake in 1998,” Durbin said. “Undue hardships should not be the only path to address student loans in bankruptcy. We should go back to how it was before 1998 where borrowers could seek relief after a significant waiting period. That system worked.”
The 10-year waiting period, according to the lawmakers and hearing witnesses, would reduce the “moral hazard” of borrowers taking on exorbitant amounts of student loan debt under the assumption that they’d never have to be repaid in full, stated Forbes.
A Look at Overall Market
The hearing also touched on the overall state of the federal student loan system and its failures, including higher education costs rising faster than inflation and borrowers taking on more debt than they’ll be able to repay.
“We must look at the entire higher education ecosystem to solve these challenges— recommendations to modify the bankruptcy code would address only symptoms of the larger problem,” said Sen. Chuck Grassley (R-IA). “If we don’t correct the underlying causes, then we’re closing the barn door after the horse has gotten out.”
Forty-five million borrowers collectively owe $1.57 trillion in student loan debt, according to the Household Credit and Debt report by the New York Federal Reserve Bank and cited by Forbes.