House Democrats will be introducing legislation that would allow student loan borrowers impacted by the Coronavirus pandemic and the recession to discharge their student loans.
The bill, called the COVID-19 Student Loan Relief Act of 2020, would amend the bankruptcy code to allow borrowers to discharge their student loans in bankruptcy. Federal and private student loans would be eligible.
Currently, bankruptcy laws make it extremely difficult (although not impossible) to discharge student debt in bankruptcy. Borrowers must prove that they have an “undue hardship” to justify a bankruptcy discharge of their student loans, which is a very difficult standard to meet. To try to prove that they meet the standard, borrowers must go through a lengthy and sometimes expensive process called an “adversary proceeding,” which essentially involves litigating the “undue hardship” standard in bankruptcy court.
“Why are we providing protections to banks and servicers of student loans? Given where we’re at now, it has to change,” said U.S. Rep. Mary Gay Scanlon (D., Pa.), the lead sponsor of the bill.
The bill would apply a means test to determine which borrowers are eligible. A borrower’s income must have declined by at least 20% due to the pandemic as compared to the prior year’s income, and the borrower’s income from the prior year must have been less than $75,000. Alternatively, a borrower with prior income of up to $125,000 must have experienced an income reduction of at least 30%. Borrowers with prior income of over $125,000 in the prior year must have experienced an income reduction of at least 40% due to the pandemic and recession.
Scanlon’s bill differs significantly from other student loan forgiveness proposals, many of which would not employ a means test or require student loan borrowers to go through the bankruptcy process, which can cause lasting credit damage. Earlier this week, over 100 civil right and consumer rights organizations sent a letter to Congress urging lawmakers to enact broad, across-the-board student debt cancellation, without limitations based on economic distress.
“This limitation excludes 25 million Americans — more than half of all borrowers,” the organizations wrote in reference to a similar means test provided by another relief bill, the HEROES Act. “We call on you to fight for student debt cancellation that helps all borrowers. Removing limitations based on economic distress would not only avoid unfair cutoffs but also ease administration.”