Proposed Senate Bill Offers Student Loan Borrowers a Path Forward Through Bankruptcy

Student debt trails mortgages as the biggest type of debt a consumer can take on in their life. As a nation, borrowers owe a collective $1.57 trillion in student loan debt, with the average borrower owing roughly $38,000.

While the student debt crisis has crippled many, there has been a much-contested debate on how to help borrowers find relief. While Democrats have called on Biden to help borrowers find relief through debt cancellation, no concrete plans or announcements from the Biden administration have been made, even though the student loan crisis has been a hot-button topic throughout much of the pandemic and the 2020 election.

As the debate continues, two senators have offered a non-partisan solution. At the start of the month, U.S. Senate Majority Whip Dick Durbin of Illinois and U.S. Senator John Cornyn of Texas introduced legislation that could help borrowers find a way out of crippling student loan debt.

Under the FRESH START Through Bankruptcy Act of 2021, borrowers may be able to find relief from their student loans debts through the bankruptcy. Currently, student debt is the highest type of consumer debt that cannot be discharged through bankruptcy, except with extreme difficulty. Under this proposed act, students who have taken out loans could file for bankruptcy following ten years after the first loan payment is due. The act would also require Institutes of Higher Education or IHE’s to “repay a portion of discharged federal student loans to the taxpayer, in a new cost-sharing structure.”

The act would still allow debtors to take advantage of the “Undue Hardship” option provided to student loan borrowers. This option, which has long been available, allows a select few borrowers who are facing “undue hardship” as described by federal law to move forward with discharging their student loan debt through bankruptcy. Many argue that this option is extremely difficult to take advantage of.

The new act would also hold IHE’s accountable for their role in the mounting student debt crisis. The proposed bill by the senators explains this accountability would occur “by creating provisions that colleges with more than one-third of their students receiving federal student loans to partially refund the government if a student’s loan is later discharged in bankruptcy.” The act stipulates that this provision would only exist for schools that have consistently high student loan defaults and low repayment rates while students are attending the institute.

Overall, the senators contend that this legislation would offer borrowers a way forward in order to “get back on their feet.”

New Student Loan Relief Act Faces Backlash

While this latest break in the student loan crisis seems like a viable option, not all are on board with the proposed path forward.

The United Negro College Fund (UNCF) shared in a review their strong opposition to the bill. Communication spokesperson Monique LeNoir explained that the UNCF opposes the bill in its current form because it “includes institutional risk-sharing provisions.” LeNoir adds that “UNCF would support the baseline bill without these provisions.”

The president and CEO of UNCF details that the propositions in the law would disproportionately impact historically Black colleges and universities (HBCUs) because there exists the possibility that “institutional risk-sharing” could end up bankrupting HBCUs.

Senior vice president for public policy and government affairs at UNCF, Lodriguez Murray, explains, “Institutional risk-sharing would have a disproportionately negative impact on HBCUs because they force colleges and universities to make financial payments to the United States Department of Education when their students default on their student loan without consideration for the background of the students.”

The organization has expressed that they would be able to continue supporting the bill if the provision for risk-sharing was taken out.

This new bill appears to offer a non-partisan solution to a topic so highly contested by both Democrats and Republicans. Progressive members of Congress, including Alexandria Ocasio-Cortez and Elizabeth Warren, have routinely voiced their support for an executive order from Biden canceling up to $50,000 for borrowers. Conversely, many Republican congress members and some Democrats have opposed a broad cancellation of student loan debt. A bill like this could be a balanced middle ground.

“Student loan debt follows you to your grave,” Durbin said of the proposed bill. “For years, I have supported allowing struggling borrowers to discharge their loans in bankruptcy as a last resort. Our bipartisan bill finally gives student borrowers – some who were misled into taking out costly loans by predatory for-profit colleges – a chance to get back on their feet when they have no other realistic path to repay their loans.”