Biden's step toward allowing student loan discharge in bankruptcy is 'a step in the right direction,' director of new student loan documentary says, but 'the devil is always in the details'

• The Education and Justice Departments on Thursday issued new guidance on bankruptcy for student-loan borrowers.
• Though "it's a step in the right direction," director of "Loan Wolves" Blake Zeff told Insider, it may not be a real fix.

Student debt has been making headlines due to the Biden administration's one-time cancellation initiative — currently held up by the courts — and another pause on repayment, until June 30, 2023.

But, according to Blake Zeff, director of the new documentary "Loan Wolves," there's an under-discussed solution for the ballooning crisis that impacts 43 million borrowers who hold more than $1.6 trillion in debt: bankruptcy.

Currently, two words inserted into a '90s law make it nearly impossible for borrowers to declare bankruptcy over student loan debt.

'Undue hardship'

"Loan Wolves" follows Zeff as he traces the mysterious origins of the "undue hardship" clause — a phrase included in the 1998 reauthorization of the Higher Education Act, which outlined federal guidelines for education funding, and caused the bankruptcy complications student loan borrowers deal with today.

Zeff, who worked as a senior aide for three years for Sen. Chuck Schumer and a senior policy and communications adviser in the New York Attorney General's Office before pivoting to a career in journalism, has spent the greater part of the last six years researching student loans, bankruptcy, and the "undue hardship" clause.

In the existing laws around student debt, borrowers must prove "undue hardship" in order to discharge the debt through bankruptcy, which means a judge must determine the borrower has made a good-faith effort to repay the debt, but can't maintain a "minimal standard" of living and their circumstances likely won't improve. The high legal standard has long been criticized as both too subjective and too steep a requirement to make borrowers meet, including by organizations such as the American Bar Association.

Few borrowers — even those struggling with cancer and debilitating epilepsy — are able to discharge their student loans under the "undue hardship" standard, which is a more strict requirement than discharging other debts, including credit cards, gambling debt, or collection agency accounts.

A 'step in the right direction'

On Thursday, November 17, the Departments of Education and Justice issued new guidance regarding bankruptcy for student-loan borrowers in an effort to make overwhelming debt easier to get rid of.

However, the new rules may not be the fix it promises to be.

"It's certainly a step in the right direction, and I'm really glad that this is a conversation that has made its way to the president's desk," Zeff, a former politics editor at Salon, told Insider. "But, look, the devil is always in the details with these things."

The Biden administration's new guidance seeks to clarify the factors necessary to meet the "undue hardship" standard by taking into account a borrower's current and future ability to pay, as well as a good-faith effort to make payments, as determined by Justice Department attorneys in consultation with the Department of Education.

Though the new guidance may prove helpful for some, the criteria are still somewhat subjective and are not codified into law, meaning they may be disregarded by the next administration, if a law is not passed.

"The current undue hardship method of student loan discharge is random, arbitrary, and unfair," National Consumer Law Center Staff Attorney John Rao said in a recent statement about the new change. "The new guidance has the potential to provide a meaningful avenue for relief, but its effectiveness will depend on how it is implemented by the Departments of Education and Justice."

The conversation surrounding the "undue hardship" clause and student loan discharge through bankruptcy has evolved in recent years, as the Biden administration has progressed on promises to discharge some student debt and address the growing debt crisis.

Cancelation of student debt?

The administration's effort to discharge between $10,000 and $20,000 per federal borrower is currently stalled by legal challenges, and its fate is being appealed to the Supreme Court.

The Department of Education's move to clarify the bankruptcy criteria is an indicator the administration is focused on additional elements of the student debt crisis.

"It's kind of good news and bad news because my sense is that one of the reasons why the president is now looking at bankruptcy is because his cancelation plan is in legal jeopardy," Zeff said, referring to a Texas court ruling currently preventing the Biden administration from forgiving some student debt. "And my sense is that, if the plan to cancel between $10,000 and $20,000 per borrower went through, you can kind of imagine them thinking 'Well we addressed, this let's move on,' and I wonder if the reason they're now looking at these other parts of the of the puzzle, is because of the uncertainty around the cancelation."

Through the course of the film, Zeff's questioning of the clause goes all the way to Senate Majority Leader Chuck Schumer and Sen. Dick Durbin, both of whom are working on student loan debt fixes, albeit in different ways. Schumer has been pushing Biden to cancel student loan debt. And last year, Durbin introduced a bill that would provide bankruptcy as an option for borrowers who have no realistic way to pay back their "overwhelming" student debt.

Bigger than just student debt

"This movie on the surface is about student loans, but I think it's really in many ways about our democracy more broadly," Zeff said. "Because you're really seeing how a bill becomes a law — and that it's not the way we were taught when we were in school with the 'Schoolhouse Rock' — and then in terms of trying to even track down who's behind some of these provisions, that was a whole shocking escapade. And without giving away too much, it involves some people who were never elected, and who most people have never heard of."

"Loan Wolves," premiers on December 11 on MSNBC and will be available for streaming on Peacock on December 12.