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Financial Services Law Insights and Observations

Department of Education releases RFI on undue hardship threshold

Lending Student Lending Department of Education Bankruptcy

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On February 21, the Department of Education published a Request for Information (RFI) seeking feedback on whether there is a need to clarify the threshold for “undue hardship” when evaluating bankruptcy cases in which borrowers seek to discharge student loans. According to the RFI, current U.S. Bankruptcy Code states that student loans can be discharged in bankruptcy claims only if “excepting the debt from discharge would impose an ‘undue hardship’ on the borrower and the borrower’s dependents.” However, according to the RFI, the term “Undue hardship” has never been defined by Congress in the Bankruptcy Code, nor has the Department been delegated the authority to do so. Instead, the context for proving a hardship claim falls under one of two tests summarized in the department’s 2015 Dear Colleague Letter (2015 Letter). The RFI requests comments on the following: (i) what factors should be considered when evaluating undue hardship claims; (ii) the weight to be given to any such factors; (iii) whether the use of two tests result in any “inequities among borrowers”; (iv) under what circumstances should loan holders “concede an undue hardship claim by the borrower”; and (v) whether and how changes should be made to the 2015 Letter. Comments on the RFI are due May 22.