The ‘Don Quixote’ of canceling student debt

Student Loan Attorney Austin Smith. Photo Credit: Alan Chin for Insider

When I first started writing about student loans more than a decade ago, prevailing wisdom said that any borrower who takes out debt to finance their education won’t be able to get rid of it in bankruptcy. You’d hear that often in interviews and read it in student loan advice blogs.

This mindset was so prevalent that when I checked the website of one of the nation’s busiest bankruptcy courts, the Southern District of New York, I found a “Bankruptcy Mythbusters” presentation which stated, flat out, that student loans are not dischargeable in bankruptcy along with the mea culpa, “yeah, sorry about that.”

That advice turned out to be wrong.

If you closely study the U.S. bankruptcy code, it does not provide a blanket exemption from bankruptcy discharge for all student debt. There are exceptions that borrowers can take advantage of to get their student loans wiped out in bankruptcy and get a fresh start. And borrowers are increasingly finding success doing so when they ask judges to look at the totality of their circumstances and discharge their student debt.

For example, Cecelia Morris, the chief bankruptcy judge for the Southern District of New York, made headlines in 2020 when she canceled about $220,000 of student loans owed by a U.S. Navy veteran. “Most people (bankruptcy professionals as well as lay individuals) believe it impossible to discharge student loans,” Judge Morris wrote in her decision. “This Court will not participate in perpetuating these myths.”

In May, I profiled Austin Smith, the lawyer who spotted this legal discrepancy and has turned it into a new area of bankruptcy litigation in which borrowers crushed by student debt are increasingly able to seek a lifeline. Smith estimated that he has prevailed in about 75 cases, leading to the canceling of some portion of his clients’ student debts and upending years of case law that had steadily built up in lenders’ favor. Smith’s determination to proceed with his novel legal arguments against the odds prompted one federal judge to call him the “Don Quixote” of student debt, which Business Insider used as the headline for my ~3,500 word feature on Smith. Here’s the link to the story, which became a Twitter moment after it published.

I followed up my profile of Smith with an explainer of the various ways in which student loan borrowers can seek relief from their debts. Here’s the link to that post, which proved quite popular with Business Insider readers.

Student loans are an incredibly complex – and important – topic in the U.S. But it sometimes feels like there’s nothing new under the sun when it comes to student debt since we’ve all read the stories of struggling borrowers and the difficulties they face navigating the system. So I figured that taking a different approach – profiling the work of a lawyer in this space, as opposed to his clients – might give provide a fresh avenue from which to understand the evolving nature of student debt in the U.S.

I say evolving because just like judges’ outlooks on the law have changed since Smith began litigating these cases in 2015, the student loan marketplace in the U.S. has also transformed over the last decade. The federal government now owns the vast majority of the $1.7 trillion of student debt outstanding and pressure is building on the Biden administration to provide relief to borrowers as the COVID-19 pandemic continues to upend Americans’ finances.

To ease the burden, the federal government has temporarily suspended payments, stopped collections on defaulted loans, and cut interest rates down to zero on its $1.59 trillion portfolio of student debt. But those relief measures, while recently extended, will expire in January 2022 (here’s a good article from The Washington Post on what you need to know about the payment pause and smart money moves you should make if it affects you).

I’ll be watching to see how this develops. As always, if you have a newstip or story idea related to student loans, get in touch.