Under Trump, it could become more difficult for student loan borrowers to file for bankruptcy

Thanks to new guidance from the Biden administration, more federal student loan borrowers have been able to discharge their debts in bankruptcy in recent years.

Those softer policies could be at risk when President-elect Donald Trump enters the White House in January, experts say.

Borrowers need to know this:

If the Trump administration takes power, “I suspect we’ll see a tightening of relief,” said Malissa Giles, a consumer bankruptcy attorney in Virginia.

For that reason, Giles said she plans to be “a little more conservative” with the clients she recommends seeking bankruptcy because of their student debt.

“We’re probably not submitting the cases that are in greater demand right now,” Giles said. “I don’t want people to spend their money on it if it might not come through.”

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University expert Mark Kantrowitz also expects a turnaround.

“The Trump administration will likely rescind this guidance,” Kantrowitz said, pointing to the Biden administration’s looser rules for insolvent student loan borrowers.

Latife Neu, a bankruptcy attorney in Seattle, said she wasn’t sure bankruptcy would necessarily become more difficult for student loan borrowers under Trump.

“There is a surprisingly strong consensus across the political spectrum,” Neu said, that the higher hurdle for student loan borrowers to discharge their debts in bankruptcy is “defective policy.”

The Trump transition team did not immediately respond to a request for comment from CNBC.

In fall 2022, the U.S. Department of Education and the U.S. Department of Justice released updated bankruptcy guidelines to make it easier for struggling borrowers to have their student loans discharged through court.

Until now, it has been difficult, if not impossible, for people to get relief from their education debts through a normal bankruptcy process.

In the 1970s, lawmakers introduced a provision requiring student loan borrowers to wait at least five years after beginning repayments before filing for bankruptcy. Policymakers and experts had expressed concerns that students would accumulate a lot of debt and then try to get rid of it after graduation.

In 1990 the waiting period was increased to seven years. Nearly a decade later, the rules changed again so that only people who could prove their student debt posed an “undue hardship” could pay it off.

But Congress has never made clear what the term means, and lawyers and advocates say the uncertainty has led to injustice in the courts.

The Biden administration’s latest approach is treating student loans in bankruptcy court more like other types of debt, experts say. Borrowers can fill out a 15-page form describing their financial difficulties and outlining their arguments for a mulligan.

In the first 10 months of the new policy, student loan borrowers filed more than 630 bankruptcy cases, a “significant increase” compared to recent years, the Biden administration said in a statement at the time.

“The vast majority of borrowers applying for relief have received full or partial relief,” it said.