What's Happening?
The success rate for student loan borrowers seeking to discharge their debt in bankruptcy has significantly increased to 87%, according to a study published in The American Bankruptcy Law Journal. This
improvement is largely attributed to updated bankruptcy guidelines issued by the Biden administration in November 2022. These guidelines allow student loans to be treated more like other types of debt in bankruptcy court, enabling borrowers to fill out a 15-page attestation form detailing their financial struggles. The study, conducted by Jason Iuliano, a professor at the University of Utah, analyzed 652 bankruptcy discharge cases from October 2022 to November 2023. The findings indicate a marked improvement from previous years, where the success rate was 61% in 2017 and 40% in 2007.
Why It's Important?
The updated guidelines represent a significant shift in how student loan debt is handled in bankruptcy, potentially offering relief to millions of Americans burdened by educational debt. With over 42 million Americans holding student loans totaling more than $1.6 trillion, the ability to discharge this debt in bankruptcy could alleviate financial stress for many. The change is particularly impactful for women, who made up 73% of the bankruptcy filers in the study. The average student loan balance for these filers was $115,000, with some owing more than $240,000. This policy shift could lead to broader economic implications, as individuals relieved of their debt burdens may have more disposable income to contribute to the economy.
What's Next?
While the guidelines have improved outcomes for borrowers, many still do not pursue the necessary legal steps to discharge their student loans in bankruptcy. The study found that out of over 3 million student loan borrowers who filed for bankruptcy between 2011 and 2024, only 7,293 sought a student loan discharge. This suggests a need for increased awareness and legal guidance for borrowers. The Biden administration's policy remains in place, and the Education Department has no current plans to change this approach. As more borrowers become aware of the possibility of discharging their student loans, the number of filings may increase, potentially prompting further policy adjustments.
