Private student loan borrowers may have a chance to discharge their loans in bankruptcy

Friday, January 28, 2022

According to a new report, 2.6 million borrowers could have their private student loan debt discharged in federal court.

A new report from our colleagues at Student Borrower Protection Center (SBPC) found that nearly $50 billion in private student loan debt, held by 2.6 million borrowers, could actually be cancelled in bankruptcy court.

Historically, getting rid of federal or private student loan debt through bankruptcy has been nearly impossible. Borrowers and their attorneys who’ve attempted to discharge the debt (a confusing and arduous process) have tried using the “undue hardship” clause, meaning that the borrower cannot maintain a minimal standard of living (and their circumstances won’t likely improve), and that they have made a good-faith effort at repaying the debt. Proving this standard in court has been notoriously difficult and often hasn’t worked.

However, recent court rulings have sided with borrowers in stating that certain private student loans don’t meet the strict “qualified education loans” criteria set out in bankruptcy law. Instead, many private student loans are actually “direct-to-consumer” loans, through which lenders offered borrowers large sums of money to attend non-accredited colleges (such as for-profit and vocational training schools) or to fund living expenses while studying for the bar exam.

The SBPC report found that many private student loan companies misled borrowers into thinking that their private student loans were not dischargeable in bankruptcy when, in fact, they are. The report identifies that more than 2.6 million people took on $50 billion in these types of dischargeable student debts during the boom in predatory private lending that started around 2005. Another issue the report highlights: student loan servicers continuing to collect on a debt that has been legally discharged in bankruptcy court.

The Consumer Financial Protection Bureau (CFPB) recently announced that it would begin investigating any fraudulent lending practices from postsecondary schools that offer private student loans directly to their students. “Schools that offer students loans to attend their classes have a lot of power over their students’ education and financial future,” said CFPB Director Rohit Chopra in a press release. “It’s time to open up the books on institutional student lending to ensure all students with private student loans are not harmed by illegal practices.”

If you think your private student loan may be dischargeable under this broader legal interpretation, or if you are having problems with your student loan servicer, you may alert the CFPB by submitting a complaint on its website.

Borrowers with federal student loans (loans that are backed by the U.S. government, and not by a private financial institution, like a bank) can have their payments paused until May 2022.