A bill, currently in Committee before the Senate may permit many debtors encumbered with student loan debt to achieve a discharge of such debts through the process of bankruptcy. Currently, the primary avenue for the discharge of student loans in bankruptcy is through establishing such debts constitute an undue hardship.
The bill, titled the “Fostering Responsible Education Starts with Helping Students Through Accountability, Relief, and Taxpayer Protection Through Bankruptcy Act of 2021” or the “FRESH START Through Bankruptcy Act” additionally provides that certain student loans, that became due more than ten (10) years before the filing of the bankruptcy petition, may receive a discharge in bankruptcy. Specifically, the bill seeks to amend section 523(a) of the bankruptcy code, to provide discharge provided the first payment on the student loan became due more than ten years before the filing of the petition. Any suspension of the repayment period, such as forbearance, will extend the period. For example, if the debtor receives a forbearance of one year, the time period will be commensurately extended for an additional year.
The bill seems to indicate that the 10 year period applies to “covered student loans” provided by a “covered institution of higher education”. A covered student loan is defined as a student loan for which the first payment was due more than 10 years before the filing of the bankruptcy petition AND was used by the subsequent bankruptcy filer to make a payment to a covered institution of higher education on behalf of the recipient for purposes of receiving an educational benefit.
A covered institution of higher education is defined under the bill as an institution as defined in section 102 of the Higher Education Act of 1965 that participates in the Federal Direct Loan Program under part D of such Act and possesses a student body for which more than 33% are receiving such loans.
Furthermore, the bill provides that if such student loan is discharged, the covered institution must reimburse the Department of Education an amount equal to 50% of the amount discharged in bankruptcy if the default rate on student loans provided by such institution was more than 25 percent in the three years before such loan was originally due. For Federal Direct PLUS Loans received by professional or graduate students, the reimbursement rates vary.
The question becomes how many student loan recipients will ultimately qualify for such a discharge. The bill seems to suggest that if a student attends an institution that is not defined as a covered institution [meaning it contains a student body for whom less than 33% receive such loans] then the filer of the bankruptcy cannot avail themselves of the 10-year rule. Other questions are posed. For example, if the monies were not delivered on behalf of the recipient for purposes of receiving an educational benefit, then is the bankruptcy filer not entitled to a discharge?
Despite these questions, it appears many bankruptcy filers who received student loans and have met the ten (10) year requirement will be eligible for discharge of such student loans. Most institutions of higher education undoubtedly receive a large portion of their revenues from the granting of such student loans and most student loans are granted in order to deliver the student an educational benefit.
Furthermore, if such a bill is enacted in law, the effect on such institutions and its student may be dramatic. Many programs which do typically do not deliver beneficial employment opportunities to their graduates may be eliminated. Institutions that carry high default rates may very well disappear. Marginal students may be excluded from matriculating in such institutions. The entire landscape of higher education in the United States may likely be transformed.
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