Durbin Highlights Measure To Allow Student Loan Debt To Be Discharged In Bankruptcy

CHICAGO – U.S. Senator Dick Durbin held a news conference highlighting new bicameral legislation that would give Americans overwhelmed by student loan debt the option of obtaining meaningful bankruptcy relief. The Student Borrower Bankruptcy Relief Act of 2019 — introduced last month with Senator Elizabeth Warren (D-MA), and U.S. Representatives Jerrold Nadler (D-NY-01) and John Katko (R-NY-24) — would eliminate the section of the bankruptcy code that makes private and federal student loans nondischargeable, allowing these loans to be treated like nearly all other forms of consumer debt. The Senate bill is cosponsored by U.S. Senator Tammy Duckworth (D-IL).

“Filing for bankruptcy should be a last resort, but for those student borrowers who have no realistic path to pay back their crushing student loan debt, it should be available as an option to help them get back on their feet,” said Durbin. “Our nation faces a student debt crisis, and it’s time to restore the meaningful availability of bankruptcy relief to student loan borrowers.”

Most forms of debt, such as credit card debt and medical debt, can be discharged through the bankruptcy process.  Only a limited number of debts, such as child support payments, alimony, overdue taxes, and criminal fines, are treated as nondischargeable in bankruptcy.  However, current federal law also makes student loan debt nondischargeable except in extremely rare cases. 

Student debt has not always been given special exemption by the bankruptcy code.  Prior to 1976, federal and private student loan debt were both fully dischargeable.  Congress then began steadily narrowing the grounds upon which student loan bankruptcy relief could be granted until, in 1998, federal student loans were made completely nondischargeable absent a showing of “undue hardship” which courts have construed to be nearly impossible to demonstrate.  In 2005, Congress also made private student loans nondischargeable in bankruptcy.  As a result, student borrowers who find themselves unable to repay their loans are now saddled with this debt for life.   

Forty-four million Americans owe more than $1.5 trillion in student loan debt.  Cumulative student loan debt has surpassed credit card debt to become the second largest category of private consumer debt after mortgages, and student loan debt is the fastest growing segment of U.S. household debt, increasing by 157 percent since 2007.  Nondischargeable student debt is constraining the career and life choices of student borrowers, and analyses by the Federal Reserve show that the student debt burden is affecting the broader economy. 

Since this country’s founding, Americans have had the ability to start over through bankruptcy.  Filing for bankruptcy is not a step that student borrowers would take lightly, and the strict means test for bankruptcy filing that Congress imposed in 2005 would ensure that borrowers who have the means to repay student debts cannot simply liquidate them in bankruptcy.  However, for those student borrowers who have no realistic path to pay back their student loan debt burden, bankruptcy should be available as an option to help them get back on their feet. 

The Student Borrower Bankruptcy Relief Act of 2019 is supported by organizations including Americans for Financial Reform, Center for Responsible Lending, Consumer Federation of America, Consumer Reports, National Association for College Admissions Counseling, National Association of Consumer Advocates, National Association of Consumer Bankruptcy Attorneys, National Consumer Law Center (on behalf of its low income clients), National Student Legal Defense Network, Student Debt Crisis, Public Citizen, U.S. PIRG and Young Invincibles.  


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