Federal government explores bankruptcy option for student debt

The federal government is considering making it easier to declare bankruptcy on student loans.

It is notoriously difficult to declare bankruptcy on student loans. As MarketWatch reports, the new chairman of the Federal Reserve recently pointed out that the fact that student loan holders typically can't declare bankruptcy on their loans makes little economic or social sense. Now the federal government is looking at a number of ways to ease the burden that student debt places on borrowers, including potentially making it easier for student loan borrowers to declare bankruptcy.

Why bankruptcy is not an option

Technically, it is possible to declare bankruptcy on student loans, but to do so borrowers need to prove that they face "undue hardship." However, as CNBC reports, because Congress has never defined what constitutes "undue hardship" and there is little case law for courts to go by, reaching that threshold is effectively out of reach for most borrowers. In practice, discharging student loans is nearly impossible except in the most extreme circumstances.

That fact came in for criticism from Jerome Powell recently, who is the new chairman of the Federal Reserve. He noted that student loans are the only type of loan that consumers cannot discharge through bankruptcy. That situation means that consumers are saddled with huge debt loads at a time of their life when they are looking to buy homes, start families, and begin their careers. With such high debt, however, they struggle with poor credit ratings, which in turn makes it difficult for them to qualify for mortgages or contribute to the economy in other ways.

Making bankruptcy an option

Aware of the limits student debt places on consumers, the U.S. Department of Education is looking at making bankruptcy more of a worthwhile option for certain borrowers. Specifically, the Education Department is exploring how to more explicitly define "undue hardship" so that borrowers would have a clearer idea if they qualify for discharging their student loans.

While it is not yet clear how the Department of Education will rework the definition of "undue burden," in the past criti cs have called for specific thresholds to be applied. For example, eligibility for social security or having a disability related to military service are two proposed thresholds that have been proposed previously by lawmakers.

Currently, Americans are carrying approximately $1.5 trillion in student debt and about 40 percent of all borrowers are expected to default on their student loans within five years.

Help with student debt

For those struggling with student debt, options are available. While for the time being discharging student loans themselves may be difficult, bankruptcy could nonetheless be an option for other types of debts, which in turn would make one's student loans less of a burden. A bankruptcy attorney can help those who are financially struggling understand what their legal options are and if bankruptcy may offer the breathing room they need to get back on their feet.