Bankruptcy may soon become easier for student loan borrowers

The U.S. Department of Education is considering making bankruptcy easier for struggling student loan borrowers.

Americans owe a staggering $1.5 trillion in student loans, according to CNBC. Even worse, a huge portion of borrowers will struggle to pay back those loans, with about 40 percent of them defaulting on their student loans by 2023. Not only does that massive debt burden hold back borrowers, it also holds back the economy, as was recently pointed out by the new chairman of the Federal Reserve. With growing recognition of the problems posed by thestudent debt crisis, the U.S. Department of Education announced that it will explore ways to make bankruptcy a more realistic option for student loan borrowers.

Why student debt hurts everyone

Most people go into debt in college with the expectation that their education will lead to better paying jobs in the future. Thus, student debt is often seen as an investment. However, with tuition spiraling upwards, the burden that student debt places on borrowers is quickly outweighing many of the benefits that borrowers would otherwise expect to receive through higher education.

As MarketWatch recently reported, new Federal Reserve chairman Jerome Powell is one of the many high-ranking individuals in government and finance who are now sounding the alarm on the student debt crisis. Massive student debt doesn't just punish individual borrowers, he pointed out recently, it also drags down the entire economy. Because borrowers are straddled by poor credit ratings and are putting a significant portion of their pay checks towards their loans, they struggle to get mortgages, afford a down payment on a car or house, or spend money in ways that would more directly benefit the economy.

Clarifying "undue hardship"

Many people believe that student loans are impossible to discharge through bankruptcy. Technically, that is not quite true. Student loans are dischargeable so long as the borrower can prove that they are suffering from "undue hardship." The problem, however, is that neither Congress nor the courts have ever agreed on a standardized definition of what constitutes "undue hardship." In effect, without a standard definition, reaching the "undue hardship" threshold is nearly impossible for most borrowers.

That may soon change, however, as the U.S. Department of Education says it is exploring how to more explicitly define "undue hardship." Analysts say that the Education Department is likely to look at ways of broadening the definition so that more people will qualify for bankruptcy and will have a clearer idea when they reach the threshold for "undue hardship."

Struggling with debt?

While student debt is treated differently from other types of debt, borrowers who are struggling with payments should not assume that they are without options. Even if bankruptcy is not feasible, student debt can be made more manageable in other ways, including through repayment programs and consolidation. A bankruptcy and consumer debt attorney can help individuals understand what options they may have for handling their student debt and for getting their finances in order faster.