[Updated to reflect an extension of the deadline for consolidating to receive the benefit of the account adjustment.]
Chapter 13 debtors with student loans may benefit significantly from new regulations taking effect on July 1, 2024. John Rao at NCLC has provided a great summary of what's coming. Check it out here.
Locally, we developed a template for nonstandard language to allow a debtor to maintain payments under an IDR plan during a Chapter 13 plan. The new regulations likely reduce the need for that type of plan provision. Some debtors may still benefit from that treatment of student loans, but the new regulations make it possible to receive much of the same IDR credit without the complication of classifying their student loan claims. (The article does recommend new nonstandard language as a tool for enforcing compliance with the regulation.)
These new regulations follow some other significant developments on student loan issues:
Most bankruptcy practitioners are probably aware of the guidance issued by the Department of Justice and Department of Education regarding the handling of proceedings to discharge student loan debt. It offers a more debtor-friendly process for obtaining an undue-hardship discharge through an adversary proceeding.
More under the radar, however, has been an "account adjustment" the Department of Education has undertaken in an effort to remedy past servicing problems that may have denied borrowers the benefit of available IDR options. This one-time adjustment will provide borrowers retroactive IDR credit for significant periods of time, including any months in repayment status, regardless of payments made, and certain periods of time in forbearance or deferment. A deadline relating to this account adjustment is approaching: June 30, 2024 (extended from an earlier deadline of April 30, 2024). Borrowers whose loans are not held by the Department of Education may not receive the full benefit of this account adjustment unless they consolidate into a direct loan by that date. Borrowers with loans issued prior to July 2010, for example, may have loans under the Federal Family Education Loan (FFEL) program. These loans were private loans guaranteed by the federal government. Because the government does not hold the loans, the forgiveness options are more limited. Consolidating these loans into direct loans may make more of these options available. Find more information here and here (including information about how to determine what type of loans a borrower has). Note that this consolidation involves a new loan, so taking this step after the filing of a petition does require careful consideration. The consolidated loan would not be eligible for discharge in the case, for example, so the debtor would not be able to take advantage of the guidance described above without filing a new case. And the consolidated loan would not necessarily receive the same treatment as the original claims would have. The debtor would probably be responsible for servicing the new loan in addition to the bankruptcy plan payments. That may not matter if the debtor is immediately eligible for a discharge of consolidated student loan, but it could present a problem if not.
The Department has also established a new IDR plan, called the Saving on a Valuable Education (SAVE) Plan. It offers lower monthly payment options and a shorter timeline for forgiveness for borrowers with smaller initial loan balances. Find information about that plan here. A calculator to estimate payment options under various IDR plans is available here.
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