Borrower Forgiveness Amid America’s Student Loan Crisis

By April 16, 2019 July 16th, 2019 Bankruptcy & Debt Relief
A History of Student Loan Debt and Bankruptcy

Recent college graduates typically enjoy a six-month grace period before they must begin paying back their student loans. However, this is often not enough time to secure employment, find a place to live, and settle into post-graduate life.

A Student Loan Crisis

One in 15 borrowers has considered suicide because of exorbitant loans, a fact that clearly illustrates the growing crisis.

In the United States, 45 million individuals have a combined $1.5 trillion in student loan debt. The ballooning debt comes with increasingly aggressive collections tactics. In 2018, the US government’s Treasury Department collected $2.9 billion in delinquent student loans. During the first half of fiscal 2019, collections already total $3.3 billion.

The Consumer Financial Protection Bureau received almost 2,500 complaints about the Treasury Department’s attempts to collect on debt throughout 2018. Methods include rapid redialing and harassment of family members, friends, and neighbors.

The Consequences of Defaulting

What happens when you can’t repay your student loans?

The Treasury Department can withhold your Social Security payments (including Social Security Disability), federal income tax refunds, state tax refunds, and paychecks. The state you live in can suspend your driver license. The costs associated with collecting your student loan debt (collection agencies, processing, litigation, etc.) can also be added to the total amount you owe.

Student Loan Forgiveness: Disability

Under a 2012 law, people who are totally and permanently disabled are eligible for student loan discharge. Total and permanent disability can be shown one of three ways:

  1. You receive Social Security Disability Insurance or Supplemental Security Income and are not scheduled for a medical review for a minimum of five years.
  2. You are a veteran with a Department of Veterans Affairs rating of 100% disabled.
  3. Your doctor (M.D. or D.O.) certifies that you cannot work due to a total disability.

Social Security Disability

In 2013, the Education Department made it easier for totally and permanently disabled borrowers that rely on Social Security to have their loans discharged. It is no longer necessary for the Education Department to review your disability in addition to SSD reviews.

Now, your award letter from Social Security serves as proof of your disability for the Education Department as well. Social Security’s ruling is proof that you are physically or mentally unable to work for the long term and, based on your income from SSD, it would be extremely difficult for you to repay federal student loans.

This change occurred in response to 3,000 public comments, pressure from a dozen consumer and civil rights organizations, and an investigation by ProPublica and the Chronicle of Higher Education. However, until 2016, forgiveness via Social Security Disability required you to submit your award letter as proof of your disability.

Under the Obama administration, the Education Department and Social Security Administration began actively seeking out individuals who qualified for loan forgiveness due to disability. “The agencies found 387,000 matches in their first review, of whom 179,000 were in default on their loans and at risk of having their Social Security benefits garnished,” The Washington Post reported.

Service-Related Disability

Approximately 42,000 disabled veterans meet the eligibility requirements for student loan forgiveness. However, only 18 percent of them have applied for the program, according to the Department of Education.

The Trump administration introduced an initiative to increase this percentage, building on President Obama’s Student Aid Bill of Rights. The same streamlined process that allows individuals receiving Social Security benefits to have their student loans discharged now applies to veterans as well. In 2018, the Department of Education began identifying eligible veterans for loan forgiveness. This process reaches disabled veterans who may not otherwise know they could be released from their obligations to pay back the loans.

Nelnet, the federal government’s loan servicer, explains the program to disabled veterans in a letter and gives the veteran 120 days to respond. To complete the process, all disabled veterans must do is sign and return the application sent to them. While the application is processed, the veteran does not need to make loan payments. If a veteran does not respond in 120 days, Nelnet sends a reminder. If the veteran still does not respond, the government can begin collecting on the debt.

Student Loan Forgiveness: Bankruptcy

It is difficult to discharge student loan debt in bankruptcy. To do so, you must demonstrate that your debt fits the definition of “undue hardship.” All federal courts of appeal, with the exception of the 1st and 8th Circuits, adopted the Brunner Test to identify undue hardship:

  1. Would you be able to maintain a minimal standard of living if you had to repay the loan?
  2. Are the financial difficulties you face temporary, or are they expected to continue for several years?
  3. Have you made efforts to keep up with your student loan payments before filing for bankruptcy?

“The law is very delineated on the matter of student loans in bankruptcy,” Kevin J. Bambury, attorney, Jeffrey Freedman Attorneys, PLLC said. “It does not allow the discharge of student loans unless the debtor and the debtor’s dependents would be under undue hardship if the debtor has to continue making payments.”

The bankruptcy code was last updated in 2005. At that time, student loan debt was so low it wasn’t part of the Federal Reserve’s consumer debt reports. Prominent members of the bankruptcy community, including lawyers, professors, and former judges, are proposing changes to the code that would offer some relief to student loan debtors.

Oregon Democrat Peter DeFazio proposed legislation in Congress in 2016 that would significantly change the bankruptcy rules regarding student loans and provide relief for some borrowers. It would also broaden the definition of undue hardship. In 2018, the Department of Education requested public comment to determine whether undue hardship should be evaluated differently.

The Future of the Student Loan Crisis

Multiple presidential candidates have proposed policies to curb the student loan crisis. One of the most notable is from Democratic candidate Elizabeth Warren. For anyone with a household income of less than $100,000, Warren’s plan would cancel up to $50,000 in student debt. For those who make up to $250,000, debt would be partially canceled. People making over $250,000 would remain unaffected.

As Senator Warren explained, “The enormous student debt burden weighing down our economy isn’t the result of laziness or irresponsibility. It’s the result of a government that has consistently put the interests of the wealthy and well-connected over the interests of working families.”

Along with curbing the student loan crisis, Senator Warren wants to eliminate undergraduate tuition at two- and four-year public institutions. Together, these plans would cost $1.25 trillion over the next ten years. Revenue from Warren’s proposed wealth tax, generating $2.75 trillion, would finance student loan forgiveness and free tuition.