Student Debt Increasingly Wiped Away by Bankruptcy

Student loan borrowers are seeing increased success in discharging their loans in bankruptcy court.

That’s according to a report Sunday (Dec. 28) by The New York Times (NYT), citing a study by Jason Iuliano, a professor at the University of Utah’s S.J. Quinney College of Law.

It found that a vast majority of student debtors who look to dismiss their loans via bankruptcy are successful in their efforts, largely due to a streamlining of the legal process three years ago by the U.S. Departments of Justice and Education.

The study showed an 87% success rate among borrowers in dismissing most or all of their loans in bankruptcy, up from 61% in 2017, and more than twice the rate of nearly two decades ago, the report said.

“That’s strikingly high when you think about the narrative being it’s impossible to discharge,” said Iuliano, whose analysis was published this month in The American Bankruptcy Law Journal.

According to NYT, borrowers had traditionally avoided trying to dismiss student debt via bankruptcy. The process required them to file a separate lawsuit called an adversary proceeding, and — in some places — demonstrate that their financial situation was “hopeless” before a judge would be willing to erase their debts.

However, Iuliano argued that the new streamlined process hasn’t yet convinced enough debtors, or their legal advisers, to try. Using prior research, he estimated that 99% of student debtors who sought bankruptcy protection didn’t even ask the judge to consider discharging their debt.

“That is a big problem,” he added.

However, a shift could be underway. NYT cited analysis of public records by Stretto, a legal services and technology company, that shows 1,693 student loan debtors have filed adversary proceedings this year, a 12% increase from last year and up 92% from 2023.

The news comes amid increasing pressures on student loan borrowers, 20% of whom missed at least one payment this year. And the Education Department is reportedly preparing to garnish the wages of defaulting borrowers.

Meanwhile, PYMNTS Intelligence research has found a mix of regret and pride among the parents and students who have taken on debt to fund their or their children’s education.

The burden is heaviest among the paycheck-to-paycheck consumer, a designation that, as of July of this year, applied to a little more than 7 out of every 10 Americans.

Around 20% of this group reported that education expenses help keep their budgets as tight as they are. Opinion in this group is divided on education’s payoff: 52% say their degrees helped their earning power enough to justify the price tag, while a little less than half said their earnings fell short of expectations.