Wednesday, August 4, 2021

Bipartisan Senate Bill Would Permit Debtors to Cancel Student Loans in Bankruptcy After 10 years: Too Good To Be True?

 Is this the year of Jubilee? Is this the year that distressed student-loan debtors finally get to shake off mountainous debt in the bankruptcy courts? 


This week, Senator Richard Durbin, an Illinois Democrat, and Senator John Cornyn, a Texas Republican,  filed a bill that would allow college-loan debtors to discharge their federal student loans in bankruptcy after a ten-year waiting period.  

This bipartisan bill, titled the Fresh Start Through Bankruptcy Act, would also require colleges with high student-loan default rates to partially repay the government for the cost of discharged loans.

 Will this bill make it through Congress? After all, Senators Elizabeth Warren and Claire McCaskill filed legislation to stop the Department of Education from garnishing the Social Security checks of elderly loan defaulters. That proposal went nowhere. And Representatives John Delaney and John Katko filed a bill to take the "undue hardship" language out of the Bankruptcy Code, and that bill died a quiet death.

I am enthusiastically in favor of the bill filed by Senators Durbin and Cornyn. I hope it passes. 

But if it does, Congress will need to repeal the Grad PLUS Act, which allows students to borrow unlimited amounts of money for graduate school. We can't let someone run up a quarter of a million dollars in student-loan debt getting a doctoral degree in music theory, and then shed all that debt after ten years.

And we will undoubtedly need more bankruptcy judges. Approximately 45 million people are carrying student loans. Several million of them will be immediately eligible for bankruptcy relief if the Durbin-Cornyn bill passes. That's a lot of people showing up at the nation's federal courthouses.

Congress will also have to address the abusive for-profit college industry if overburdened student debtors get access to the bankruptcy courts.  As student debt gets cleared through bankruptcy, it will quickly become evident that many bankrupt student borrowers acquired their debt at for-profit colleges.

But perhaps those are reforms for another day.

I have been arguing for bankruptcy relief for student-loan debtors for more than 20 years. If the Durbin-Cornyn bill passes, what will I write about? 

I may have to say, as the Lone Ranger often observed at the end of his weekly television show, "My work here is done."

On the other hand, who really believes Congress will do the right thing?

The Lone Ranger: "My work here is done."


  1. Thanks, this is exciting. How would this bill affect the students who are on extended payment options? I assume they could not declare bankruptcy, despite a 25 year burden. If that is the case, what kind of debtor would be able to declare bankruptcy right now? I think that private loans are exempt from this law.

  2. Hi, Bob. Thanks for writing. You raise a very good question. I posted an essay yesterday on a woman who owed almost two-thirds of a million dollars in student-loan debt, but she was denied bankruptcy relief because she was eligible for a 2s5-year repayment plan that allowed her to make payments of only $80 per month.
    So it seems possible--even likely that the Department of Education would continue to fight bankruptcy discharge, arguing that the people seeking relief are eligible for an income-based repayment plan. If the bankruptcy courts were to buy that argument, then the law proposed by Senators Durbin and Cornyn would be rendered meaningless. A depressing prospect. Take care, Richard

  3. As you have written eloquently, an IDR plan is a terrible thing to hold over the head of a debtor for 20-25 years. Bankruptcy should indeed wipe out this kind of life-sentence.

    I was hoping that Biden's Department of Education would be less punitive than Trump's. If they are indeed holding on to IDR's, I bet that one reason is that an IDR allows the government to pretend that a student loan is still an asset. Ending the IDR will be a direct hit on the government's balance sheet, flimsy as it is.