Senate bill targets student loans in bankruptcy: What this means for student loan cancellation

The Senate Judiciary Committee met on Wednesday to discuss a new bipartisan bill, The FRESH START Through Bankruptcy Act of 2021, which would make federal student loans eligible for discharge in bankruptcy after 10 years. 

Certain higher education institutions would be responsible for repaying a portion of the remaining balance so that the burden doesn't fall solely on the federal government. Specifically, the bill would require colleges with more than a third of their students receiving federal student aid to partially refund the government if the school had consistently high student loan default and low repayment rates.

FRESH START is being poised as an alternative to student loan forgiveness, which was an issue that President Joe Biden campaigned on but has yet to deliver. At the Aug. 3 Senate Judiciary Committee hearing, Sen. Chuck Grassley (R-Iowa) said that student loan cancellation would "overwhelmingly would benefit the wealthy at the expense of others."

"We shouldn’t ask those who didn’t attend college to pick up the tab for those who did."

- Sen. Grassley, Aug. 3 Senate Judiciary hearing

Bankruptcy reform may offer a more nonpartisan solution compared to canceling student loan debt. But while bankruptcy can provide a long-term path to financial stability to consumers who are struggling, it's extremely difficult to discharge either federal or private student loan debt through bankruptcy as it currently stands. Plus, filing for bankruptcy comes with its own drawbacks, so it's not always the most favorable first choice for borrowers.

If you're struggling to repay your student loans, keep reading to learn more about your options, including forbearance, income-driven repayment (IDR) and student loan refinancing.

Private student loan refinance rates are at historic lows, and you can compare your estimated rates without impacting your credit score on Credible's online marketplace.

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How your student loans may be impacted under FRESH START

The goal of FRESH START is to "improve the integrity of the federal student loan program, and quality of education a student receives without disrupting the vast majority of educational services that do provide real value to their graduates."

FRESH START would make federal student loans dischargeable in bankruptcy, but it doesn't end there. The bill would retain the existing undue hardship option for discharging private and federal student loans in bankruptcy that have been due for less than 10 years. 

PRIVATE STUDENT LOANS CAN BE DISCHARGED IN BANKRUPTCY, BUT CONSIDER THE ALTERNATIVES 

Even if the bill is passed, bankruptcy might seem like an extreme option for certain borrowers. Chapter 7 bankruptcy, also known as liquidation bankruptcy, requires you to sell off assets and investments to pay off your debt. Chapter 13 bankruptcy restructures rather than discharges your debts. 

Filing either chapter of bankruptcy would have a lasting negative impact on your credit score, making it difficult to take out loans with favorable terms. Having a bad credit score can keep you from getting a mortgage or renting an apartment, and it makes borrowing money more expensive with higher interest rates.

Before you try to get out of student loan debt by filing for bankruptcy, you should exhaust all your options. Borrowers who are struggling with private student loan debt may be able to lower their monthly payments by refinancing, for example, to stay out of default and avoid being sued over the debt.

If you're considering refinancing your private student loans, be sure to shop around for the lowest interest rate possible to make sure you're saving as much money as you can. You can compare rates across multiple private lenders at once on Credible.

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What to do now if you can't repay your student loans

Defaulting on your student loans can result in your debt being sent to a collections agency. This can negatively impact your credit score and even result in wage garnishment if you're successfully sued over the debt.

But for borrowers struggling to repay their student loans, bankruptcy isn't always an option. You might also consider:

• Applying for deferment on your federal loans
• Enrolling in a federal income-driven repayment plan
• Refinancing your student loans to a lower rate

Federal loan borrowers can apply for economic hardship deferment or unemployment deferment. Both options can grant you a 36-month forbearance period in which you don't have to repay your loans during which income does not accrue, but not all low-income borrowers will meet the circumstances to qualify.

Borrowers with federal direct loans can also enroll in income-driven repayment (IDR) to lower their monthly loan payments. Under an IDR student loan repayment program, your payment may not exceed about 10% to 20% of your disposable income, depending on the type of loans you have.

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Finally, borrowers with private student loans could consider refinancing to a lower interest rate. Private student loan refinance rates are near all-time lows, according to data from Credible. Student loan refinancing can help you pay off your student loans faster or even lower your monthly payment.

If you have federal loans, though, refinancing comes with an important caveat: Refinancing to a private student loan makes you ineligible for federal protections like forbearance, IDR and even possible student loan forgiveness, including the Public Service Loan Forgiveness program (PSLF). 

Still not sure if student loan refi is right for you? Get in touch with an expert loan officer at Credible to discuss your options for refinancing eligible loans.

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