A growing number of Americans are filing for bankruptcy to get rid of their student debt after a three-year payment hiatus.
The Justice Department said in a news release Thursday that 632 borrowers filed for bankruptcy to eliminate student loans between November and September, an increase from previous levels. For comparison, the average annual rate before the pandemic was around 480.
This spike is “significant” because there has been a pandemic-era freeze on federal student loan payments since March 2020. But that pause officially ended in early October, creating a potential financial shock for millions of Americans.
The average monthly bill ranges from $200 to $299 per person, although it is even higher for some borrowers, according to the latest report. Federal Reserve data.
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Collectively, borrowers are expected to return to paying about $10 billion per month, according to a JPMorgan analysis.
“The Departments expect this trend to continue,” the Justice Department said in the statement.
The rise in bankruptcy filings comes a year after the Biden administration introduced a new legal pathway that made it easier for borrowers to discharge their federal student loan debts in bankruptcy.
The updated guidelines from the Departments of Justice and Education, announced in November 2022, were designed to make it easier for the government to determine whether to grant release without “unnecessarily burdensome and lengthy investigations.”
Congress had previously set a higher bar for canceling student debt compared to other types of debt like medical care or credit cards, requiring borrowers who wish to file for bankruptcy to demonstrate that they will suffer “undue hardship” if the debt is not discharged.
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Now, borrowers must prove they meet three criteria in order to get rid of their student debt: not having the ability to repay the loan currently, being unable to repay the loan in the future, and having made a good effort. faith to repay the loan.
The government said the latest loan discharge data suggests the rule change was successful in making it easier for eligible borrowers to obtain a bankruptcy discharge of their federal student loan debts.
“A year ago, we decided to simplify and improve the process for student borrowers in bankruptcy,” Associate Attorney General Vanita Gupta said in the press release Thursday. “Our one-year review indicates that our efforts have made a real difference in borrowers’ lives by ensuring that student loan payments are more accessible to eligible borrowers.”
Policy change is part of That of President Biden efforts to reduce or eliminate Americans’ student debt.
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Earlier this year, the Supreme Court struck down Biden’s student loan forgiveness plan, which would have erased up to $20,000 in loans per borrower.
Since The White House announced other efforts to reduce student debt, including wiping out $127 billion in debt owed by about 3.6 million borrowers.
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