Federal law dictates that student loan debt cannot be forgiven in bankruptcy proceedings with the exception of “undue hardship” cases. However, making an undue hardship claim is difficult to do, and loan holders will usually challenge every case often resulting in zero forgiveness for borrowers. The White House has recently asked the Department of Education to rethink this strategy by not allowing lenders to aggressively pursue every undue hardship case.
The Department of Education has turned down this suggestion. The Department’s decision is contradictory to the measures that President Obama is trying to take in order to lower student loan debt. As it stands, most borrowers that claim bankruptcy will still have to repay student loan debt regardless of current financial distress.
The Debt Mounts
Seven out of every ten college graduates will leave school with more than $20,000 in student loan debt. Due to a lack of high-paying jobs, most students that are saddled with a massive amount of debt will never be able to repay loan amounts. Often, the only way out is through bankruptcy, and that means successfully declaring undue hardship. Right on the tail of every undue hardship claim are lenders willing to spend dollars to challenge these claims.
Not only is it next to impossible for someone that has declared bankruptcy to pay a hefty monthly student loan fee, it’s not a cost-effective strategy for lenders. In order to pursue every borrower that has claimed undue hardship, a large amount of time and finances must be used – finances that could be better used elsewhere.
The line in the sand that the Department of Education has drawn means that there’s no end in sight for borrowers that have legitimately claimed bankruptcy and cannot repay a student loan debt.
Regardless of the White House recommendations, the Department of Education is not budging on its stance. This means that borrowers will have to fight lenders in order to have an undue hardship claim recognized resulting in loan forgiveness. Some consumer justice groups are urging the White House to ask the Department of Education to reconsider the earlier decision.
As of right now, it stands that anyone attempting to claim undue hardship in the case of bankruptcy will have a difficult time proving this financial status. Lenders will actively fight every case in order to force borrowers to repay student loans. This may change in the future, but there’s still no loan forgiveness in sight for borrowers that have declared bankruptcy.