The bill called the “Fresh Start Through Bankruptcy Act of 2021” is now being discussed in Congress. It proposes a change to the bankruptcy law that will now allow the discharge of student loans after 10 years. The Act also has the stated goal of holding educational institutions more accountable. Congress wants “bad” student loans to stop. The Act plans to penalize schools that create student loans that are never able to be repaid.
If this bill were to ever pass in the future then many changes would take place. Federal student loans would now be dischargeable in bankruptcy after 10 years have passed from the first payment’s due date. This would be the largest change to bankruptcy in the last 16 years. It would directly address the student loan crisis by allowing bad (uncollectible) student loan debts to be discharged.
Only federal student loans could be eliminated by bankruptcy in the current version of the bill. Private student loans could not be discharged after the 10-year mark. Also, keep in mind that Bankruptcy Act 2005 would still apply. Essentially, this would limit those who would be eligible for a Chapter 7 full debt release. The “means test” of the 2005 Act frequently forces higher-income people to file Chapter 13 instead of Chapter 7. This could limit the number of people seeking a quick discharge to their student loans. Essentially, any person of sufficient means who has acquired too many assets or too much annual income would likely not be eligible for the discharge of their student loans after the 10-year mark.
The current version of the Fresh Start bill also holds educational institutions accountable. If a school receives more than 1/3 of their tuition from federal student loans, then they will be forced to repay a portion of any loan amount that is later discharged in bankruptcy. Schools that play the federal student loan game now have to play by this new set of rules.
If an educational institution pushes too many student loans, they may force themselves into future financial failure. The same school may find itself paying back a large portion of the government loans they took out through their students. In addition, schools that prey on students with inferior programs or overstated promises will also suffer. Schools know which student programs create “bad” student loan debt. Now they will have a strong incentive to not over-push bad student loan lending. This will also put a stop to schools creating “fluff” programs with the sole purpose of getting loan funding.