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The Biden administration today released a detailed plan that will make it easier for student-loan holders to wipe out their debts using income-driven repayment plans, the Wall Street Journal reported. The proposed rule from the Education Department is a key step in overhauling the $1.6 trillion federal loan program that has left millions with ballooning debts. The administration first announced the change in August when it unveiled its plan to cancel up to $20,000 in student debt for qualifying borrowers. The Supreme Court plans next month to take up a challenge to that broader debt-forgiveness, which is frozen after being blocked by lower courts. Income-driven repayment plans were designed to help lower earners borrow for college, but few have been able to use them effectively because of technical problems and onerous amounts of income-verification paperwork. If enacted, the proposed changes would provide qualifying borrowers with significantly more-generous options that could leave them debt-free sooner, while paying off only a fraction of their total loan balances. To prevent student-debt balances from ballooning in the future, the administration plans to halve, to 5% from 10%, the amount of discretionary income borrowers must pay each month on their undergraduate loans if they are enrolled in an income-driven repayment plan. Borrowers with incomes below 225% of the federal poverty line wouldn’t have to make monthly payments on their loans. The administration estimated that that level corresponds to an individual income of less than roughly $30,600 annually or any borrower in a family of four who makes less than about $62,400 a year.

Student borrowers in the U.S. are struggling to keep up with other kinds of debt even while college payments are frozen, and a surge in delinquencies is likely if the government’s debt-relief plan fails, according to a new study, Bloomberg News reported. Among borrowers who’d be eligible for President Joe Biden’s forgiveness plan, which is mired in a Supreme Court challenge, there’s been a “stark increase” in delinquencies on credit cards and auto loans during recent quarters, economists at the Federal Reserve Bank of New York wrote in a paper. “These missed payments suggest that some federal student loan borrowers are having trouble meeting their monthly debt obligations even though student loan payments are not required,” the New York Fed analysts wrote. “We expect these delinquency patterns to worsen if federal student loan payments resume without relief.” In that case, there’ll also likely be an increase in defaults and delinquencies on the student loans themselves, which could “potentially surpass pre-pandemic levels,” according to the New York Fed. About 15% of student borrowers were behind on their debt before the COVID crisis hit in March 2020, and the government announced a moratorium on repayments.

U.S. Supreme Court justices yesterday seemed skeptical of whether bankruptcy can be used to wipe out debts incurred through fraud even in cases in which an individual declaring bankruptcy was not the one who committed the fraud, Reuters reported. California resident Kate Bartenwerfer asked the high court to overturn a ruling from the Ninth
U.S. Circuit Court of Appeals that said she could not use bankruptcy to escape liability stemming from fraudulent omissions her husband made in selling a house regardless of whether she knew about it. Bartenwerfer's attorney Sarah Harris told the justices at oral arguments that the entire point of bankruptcy law is to give honest debtors like Bartenwerfer the ability to clear debts and have a "fresh start." If Bartenwerfer is unable to discharge liability for her husband's misstatements, then other innocent debtors could also face a lifetime of debt due to others' fraudulent conduct, Harris said. "That financial death sentence would fall mostly on unsophisticated spouses," Harris said. "Dishonest debtors cannot escape their creditors, but the court does not consign unwitting debtors to the same fate." The attorney for Kieran Buckley, who sued the Bartenwerfers for selling him a house while withholding information about major defects, said that his client should not be left without recourse due to Bartenwerfer's bankruptcy.