The Education Department’s handling of requests for bankruptcy discharges from federal student loan borrowers is raising new questions about the Biden administration’s commitment to overhaul its restrictive policy.
A pair of recent appeals filed by the department resulted in a public backlash.
In one case, the department tried to fight a court-approved discharge of $100,000 in federal student loans held by Ryan Wolfson, a 35-year-old in Delaware who had never made payments on the debt. The judge concluded that Wolfson, who suffers from epilepsy, could not afford his basic needs without the support of his father and there was no evidence to suggest his plight would improve.
The other case involved Monique Wheat, a 32-year-old single mother of three in Alabama whom the court granted cancellation of $111,000 in federal students loans.
Wheat earns less than $22,000 a year and, as the primary caregiver for her ill daughter and mother, could only work weekends. The Trump administration fought her request to discharge the debt, arguing that her teenage son should get a job to contribute to the household. The courts ruled in Wheat’s favor in January, yet the Biden administration appealed the decision.
The Daily Poster, an investigative journalism site, first reported the appeals earlier this month, garnering the attention of debt cancellation and student rights activists who lambasted the Biden administration for the moves. Days later, Undersecretary of Education James Kvaal tweeted that the department would withdraw the appeal in the Wolfson case. The following week, the department said it would also stand down on the Wheat case.
Education Department spokesperson Kelly Leon told The Washington Post that the agency and the Justice Department “are working to ensure that the government does not appeal bankruptcy cases where the borrower has proven an undue hardship.”
“Borrowers in financial distress should have the ability to discharge their student loans through bankruptcy, but too often the process leads to unfair results,” Leon said in a statement. “The Department of Education is committed to revising its approach to bankruptcy to streamline the process and ensure that borrowers get a fair shot.”
Discharging education debt through bankruptcy is difficult. Borrowers must bring a separate lawsuit — known as an adversary proceeding — within their bankruptcy case to have their student loans canceled. They must persuade the court the debt would impose an “undue hardship” and fend off the lender from thwarting their effort.
As the creditor for $1.6 trillion in federal student loans, the Education Department has the right to contest a bankruptcy discharge to maintain the fiscal integrity of the lending program.
When courts approve a borrower’s request for cancellation, the department typically has 14 days to respond. In some instances, the Justice Department will file a protective notice to appeal, as it did in the two cases, to give the government more time — a strategy used in contract disputes, bid protests and other instances in which an appeal deadline exists.
The notice is not a commitment to an appeal, but consumer advocates say it raises the specter of the Biden administration backpedaling on bankruptcy reforms for federal student loans.
Any monumental shift in the treatment of student loans in bankruptcy would require congressional action, yet the Education Department could better define undue hardship and set a threshold for when to contest bids for cancellation.
And while the agency updates its policy, it could institute a moratorium on opposing student loan borrowers in bankruptcy, said Aaron Ament, president of the National Student Legal Defense Network, a nonprofit organization. His organization was among 17 consumer groups that wrote Education Secretary Miguel Cardona last week urging him to adopt the moratorium.
“Stopping appeals simply isn’t good enough. That still leaves the government fighting borrowers, often for years, trying to prevent a student loan discharge in the first place,” said Ament, former chief of staff in the department’s Office of the General Counsel under Obama. “If the department itself admits that the bankruptcy process is unfair and needs to be revised, why will they only back down once a judge rules against them?”
Senate Majority Leader Charles E. Schumer (D-N.Y.) voiced support for the moratorium on Friday, saying at a news conference that “it’s outrageous that other people get to declare bankruptcy but students can’t.”
The Education Department said it will review pending decisions and determine the best course of action on a case-by-case basis.
Ament and other consumer advocates point out that while the department has withdrawn two appeals, it is still contesting other requests for bankruptcy discharges.
The Post reviewed several recent bankruptcy cases involving federal student loans and found that department lawyers remain firm in their opposition. The position echoes that in cases The Post reviewed in July, in which Justice Department lawyers asked borrowers to take on multiple jobs or seek child support to free up money to pay off their loans.
After that reporting, Sen. Richard J. Durbin (D-Ill.), chairman of the Senate Judiciary Committee, held a hearing to explore ways to lower the barriers to discharging education debt. Durbin and Sen. John Cornyn (R-Tex.) sponsored a bill that would allow borrowers to discharge their federal student loans through bankruptcy after 10 years.
The bipartisan interest from lawmakers and the administration in bankruptcy reform is reviving the movement, after years of failed efforts to streamline the process. President Biden, who helped impose tougher consumer bankruptcy laws as a senator, said on the campaign trail he now supports letting people who enter bankruptcy discharge their student debt — a position that girds the department’s efforts.