By: Daniel L. Reinganum, Esq.

On November 17, 2022 the United States Justice Department and Department of Education unveiled new guidelines for the discharge of student loans in bankruptcy. The new guidelines clarify the Department of Education’s position on how it will respond to requests to discharge federal student loans in bankruptcy.

These guidelines apply to all federal student loans, including Direct Loans, Federal Family Education Loans (FFEL), and Perkins Loans. Private student loans are not covered by these guidelines.

Under the new guidelines, the Justice Department (as attorneys for the Department of Education) is directed to work cooperatively with borrowers in bankruptcy to determine if the borrowers are eligible for a discharge of their federal student loans.

There are three factors to be evaluated in determining whether the government should agree that federal student loans should be discharged (wiped out in bankruptcy): i.) whether the borrower has attempted to repay the student loan in good faith; ii.) whether the borrower has the ability to repay the student loan while still maintaining a minimal standard of living; and iii.) whether circumstances indicate that the borrower’s inability to repay the student loan are likely to persist into the future for a significant portion of the loan repayment period.

The major changes are that the Justice Department has relaxed their criteria for agreeing with borrowers that these elements have been met. There are two significant changes. The first is that the “minimal standard of living” is now based on the IRS’ national and local standards for what people are allowed to spend on food, housing, transportation, and other living expenses when evaluating someone’s ability to repay the IRS. The IRS’s standards represent a significantly higher standard of living than a “minimal standard of living”. Additionally, the “minimal standard of living” evaluation allows for “anticipated living expenses” that are reasonable. For example, someone who has no health insurance can be permitted an anticipated health insurance cost.

The second major change is that there are presumptions that the borrower will be unable to repay the student loan if one of five elements is met: i.) The borrower is 65 years or older; ii.) the borrower has a disability or chronic injury impacting their income potential; iii.) the borrower has been unemployed for at least five of the last ten years; iv.) the borrower failed to obtain the degree for which the loan was procured; or v.) the loan has been in payment status other than ‘in-school’ for at least ten years.

The new guidelines reflect a growing recognition of the impact that student loan debt can have on borrowers’ financial well-being. With over 45 million Americans carrying student loan debt, many are struggling to make ends meet and are unable to save for the future. Allowing more borrowers to discharge their student loans in bankruptcy could provide much-needed relief to those who are struggling.

Ultimately, the key to managing student loan debt is to be proactive and seek help when needed. If you need help with your student loans, you should consider all of your options – including a bankruptcy filing. Contact attorney Daniel Reinganum at McDowell Law to schedule your free student loan evaluation today!