Biden's new student loan bankruptcy policy is making it easier for graduates to walk away from debt, experts say - it is 'life changing'

The Biden administration's student loan bankruptcy policy is making it easier for borrowers to walk away from their debt, experts say. 

It was previously very difficult for Americans to part from their debt in court in a regular bankruptcy proceeding, but new rules are reportedly making this easier. 

'We have gotten forgiveness for a number of clients under the new bankruptcy changes,' Malissa Giles, a consumer bankruptcy lawyer in Virginia, told CNBC.

'The discharge is life changing for them and their families.'

At the end of 2022, a new process for discharging student debt in the event of bankruptcy was introduced by the Department of Justice and the Department of Education.

It was previously very difficult for Americans to part from their debt in court in a regular bankruptcy proceeding due to arduous processes

The new process was designed to make it easier to identify cases in court where it would be appropriate to forgive student loans.

Congress has traditionally set a much higher bar for cancelling student debt compared to other debt.

Policymakers were concerned that Americans would build up college debt and then attempt to unduly end their repayments. 

Borrowers have had to demonstrate that they would suffer 'undue hardship' if they had to continue paying off their student debt - a very difficult bar for borrowers to clear in practice.

But under the new guidelines for attorneys and bankruptcy judges, education debt is now treated more similarly to other kinds of debt, according to experts. 

'While the government used to fight discharge aggressively in almost every case, there is now a policy to agree when the borrower can show financial need and a history of good faith efforts to pay the loans,' Latife Neu, a bankruptcy lawyer in Seattle, told CNBC.

'I've helped several people take advantage of the expanded ability to discharge their student loans in bankruptcy,' Neu added.

According to the government departments, in the first 10 months of the new policy student loan borrowers filed more than 630 bankruptcy cases - which was a 'significant increase' from recent years.

'The vast majority of borrowers seeking discharge have received full or partial discharges,' they said in a statement. 

While it is good news for borrowers who fall into extreme financial hardship, experts warn that Americans should avoid bankruptcy.

Borrowers have had to demonstrate that they would suffer 'undue hardship' if they had to continue paying off their student debt - a very difficult bar for borrowers to clear in practice

At the end of 2022, the Biden administration introduced a new process for discharging student debt in the event of bankruptcy

Depending on the type of bankruptcy you end up pursuing, the information could remain on your credit report for up to a decade, which could impact your ability to get a mortgage or take out other types of loans.

Higher education expert Mark Kantrowitz told the outlet how borrowers should look for other relief options if possible.

Federal loan borrowers could consider an income-based plan, he said, or deferment based on economic hardship or unemployment.

After President Biden's plan to cancel up to $400 billion in student debt for millions of Americans was struck down by the Supreme Court in June last year, the administration has since used its existing authority to leave Americans with less debt. 

Under the Biden administration, more than 3.7 million borrowers have had their loans canceled, totaling $136.6 billion. 

Anyone who is struggling and considering bankruptcy should talk to a non-profit credit counselor before they file, Kantrowitz warned.