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In a move that will wipe out $1.1 billion in debt owed by 115,000 borrowers, the Education Department said yesterday that it would forgive the federal loans of students who attended ITT Technical Institute but left after March 2008 without completing a degree, the New York Times reported. The decision is the latest action by the agency to use relief programs that languished during the Trump administration to eliminate the student loans of some of the country’s most distressed borrowers. ITT, a large for-profit chain accused by federal and state officials of fraudulently luring students with inflated claims about its graduates’ earnings and career prospects, collapsed in 2016. Around 43 percent of those now eligible to have their debt eliminated had defaulted on their loans, the agency said. “Today’s action continues the department’s efforts to improve and use its targeted loan relief authorities to deliver meaningful help to student borrowers,” the education secretary, Miguel A. Cardona, said. “At the same time, the continued cost of addressing the wrongdoing of ITT and other predatory institutions yet again highlights the need for stronger and faster accountability.” Because ITT went bankrupt, the cost of the forgiven debt will largely fall on American taxpayers. Cardona announced the forgiveness under a provision known as closed school discharge, which allows those left stranded by an abrupt closure to have their federal student loans wiped out. The discharge had previously been offered to ITT students who were enrolled when the school shut down, but the announcement yesterday significantly expands the pool of borrowers who will benefit from it. The March 2008 date was chosen, the Education Department said, because that was when ITT’s executives engaged in a scheme to disguise the company’s true financial condition, which drove up costs for students and reduced the quality of the education ITT provided.

A provision in the U.S. Bankruptcy Code that makes it extremely difficult to discharge student loan debt needs to go, the American Bar Association signaled Tuesday, Reuters reported. The ABA’s House of Delegates, which sets policy for the organization, overwhelmingly adopted a resolution calling on the national lawyer group to lobby Congress to remove the “undue hardship” standard from the bankruptcy code and treat educational debt the same as other forms of unsecured debt. Currently, the undue hardship standard is so hard to meet in court that most borrowers struggling with educational debt don’t even try, said Aaron Sohaski, director of student debt and financial wellness in the ABA’s Young Lawyers Division. “While I recognize that is not impossible to discharge student debt in bankruptcy, it remains an unnecessary challenge on lawyers shouldering high debt loads,” he said. The House of Delegates approved the resolution in a vote of 251 to 71 during the final day of the ABA’s annual meeting, and no one spoke in opposition. It’s the second time this year that the ABA has taken a position on student debt. In February, the House of Delegates passed a resolution backing student loan forgiveness and measures that would make it easier for student loan borrowers to make their monthly payments. Law school graduates leave with an average $138,500 in educational loan debt, according to the latest figures from the U.S. Department of Education. Chris Jennison, the immediate past speaker of the ABA’s Young Lawyers Division, on Tuesday cited the results of a 2020 survey of ABA members early in their legal careers in which a quarter of the respondents said they have education debt loads of $200,000 or more. That survey also found that many young lawyers are delaying major life decisions such as getting married or buying a home because of their student loan debt.

Sens. Dick Durbin (D-Ill.) and John Cornyn (R-Texas) recently introduced a bipartisan bill aimed at restoring the way that student loans are handled in bankruptcy. In contrast to other recent proposals, such as free college and a student loan jubilee, this legislation isn’t a flashy proposition — it’s a great idea, one that enjoys support from both sides of the aisle among policymakers and some experts, according to a commentary in The Hill. Over the past 30 years, a series of policy changes have made it more difficult for borrowers to have their student loans discharged in bankruptcy. These policy changes were driven by the idea that investments in education could not be transferred, because the borrower would always retain the benefits acquired from their education. This would make sense if degrees paid off uniformly with large dividends, but the reality is that some investments in education fall short of that mark — unpredictably offering little or no value to the borrower. Read more.

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

The issue of student loan debt and bankruptcy is the first problem addressed in the Final Report of the ABI Commission on Consumer Bankruptcy. Click here to download your copy. 

Legislation that would restore struggling borrowers’ right to eliminate student loans through bankruptcy has gained bipartisan support in the Senate, building momentum for a legal change long sought by consumer advocates, WSJ Pro Bankruptcy reported. Sens. Richard Durbin (D-Ill.) and John Cornyn (R-Texas) yesterday announced the "Fresh Start Through Bankruptcy Act," which would allow borrowers who file for personal bankruptcy the ability to discharge taxpayer-backed student loans after a 10-year waiting period. The legislation would also require colleges to partially repay the government for the cost of discharged loans if their students have consistently high default rates and low repayment rates, lawmakers said. About 45 million Americans hold roughly $1.7 trillion in student loans, more than 90% of which is guaranteed by taxpayers, lawmakers said. In March 2020, in response to the COVID-19 pandemic, principal payments and interest accrual on student loans guaranteed by the government were paused. The moratorium was extended earlier this year by President Biden to at least Sept. 30. Expiration of that moratorium would again expose defaulting borrowers to collection action. The Education Department is evaluating whether to relax the government’s stance on when borrowers should be able to discharge student loans, continuing a review started in 2018 by the Trump administration. President Biden has also considered forgiving some student-loan debt through executive action and said he would support forgiving up to $10,000 in student debt for every borrower. Read more. 

Click here to review the bill text. 

ABI’s Commission on Consumer Bankruptcy submitted a written statement for yesterday’s Senate Judiciary Committee hearing on student loan bankruptcy reform. To view the statement, please click here. 

The full Senate Judiciary Committee will be holding a hearing today at 10 a.m. EDT titled "Student Loan Bankruptcy Reform." ABI's Commission on Consumer Bankruptcy submitted a written statement for the committee's consideration as student loans and bankruptcy were the first issue addressed in its Final Report. Illinois Attorney General Kwame Raoul, Elizabeth Gonzalez of the Public Law Center, Diane Barta, Beth Akers of the American Enterprise Institute and Christopher Chapman of AccessLex Institute are scheduled to testify at the hearing. For more information on the hearing and a link to the live webcast, please click here.