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Student loans: Could filing for bankruptcy be best for borrowers?

Student loan repayments are set to restart in October. What should U.S. borrowers know concerning where to find relief and what to avoid?

Yahoo Finance's Rachelle Akuffo and Ronda Lee are joined by Student Defense Vice President and Chief Counsel Dan Zibel and Boies Schiller Flexner Partner Adam Shaw to talk about the "predatory" nature of many private student loan companies and the for-profit colleges that partner with them.

Zibel notes many accredited universities attract potential students by promising them opportunities and easy access to funding through private loans. Shaw encourages U.S. borrowers to reassess their finances and even consider whether “bankruptcy is right for them because there may be a path there now that was not there before.”

Click here to watch more of Yahoo Finance's special coverage "Student Loans: Smarter Strategies."

Video Transcript

RACHELLE AKUFFO: As we continue our deep dive into student loans and those repayments kicking in October, today we're talking about the risks to borrowers when it comes to predatory lending, loan consolidation, and refinancing. We have a panel of experts joining us. Yahoo Finance's senior reporter, Ronda Lee; Dan Zibel, Student Defense vice president; and Adam, Shaw partner at Schiller Flexner law firm who fought in the lawsuit against the student loan lender Navient and won.

So obviously, a lot to get through here. Dan, I want to first start with you here because a lot of people are going to start getting inundated with offers about refinancing their loans or perhaps figuring out things to do. What are some of the biggest red flags people should watch out for when they're being approached about these loans or refinancing options?

DAN ZIBEL: Yeah. I think you're exactly right that we are really seeing right now a lot of folks out there hearing from companies, predatory companies trying to-- under the guise of helping. And there's a lot of confusion right now in the student loan space driven in large part by the fact that at least federal student loans haven't been in repayment for the past three years. So there's a lot to look for.

I think the number one thing is, generally speaking, we tell people not to fall victim to people calling you and asking you for advice. If it sounds too good to be true, it usually is too good to be true. And the best source of information tends to be from It is reliable, it is the United States Department of Education. At least for federal student loans, that's really the place to go to get verifiable information. But again, if it sounds too good to be true, that's typically something to be cautious of.

RONDA LEE: Dan, I'm going to jump in because I know your organization has been involved in a lot of the borrower defense discharges and helping borrowers. So can we talk a little bit about how this-- when people talk about predatory lending, a lot of times it's happening with these for-profit schools. These schools that are saying come here, you'll graduate sooner, faster, quicker. We have an 80% graduation rate, and people are getting jobs, when actually, it takes them double the time.

Let's break down to our viewers. What is actually happening because a lot of the discharges that we've seen from the education department has been from Westwood, College America, ITT DeVry. And I think a lot of them don't understand that one, there's the closed school discharge, and two, there's the borrower defense discharge. Can we talk about that? And also, can you jump into a little bit about the injunction that's happening too.

DAN ZIBEL: Sure. There's a lot to break down there. I think most of the discharges that you're referring to with specific schools have come about based on findings that institutions, largely for-profit institutions have actually defrauded students. They lied to the students, they promised them jobs, they promised them outcomes. And in reality, they didn't deliver.

And so there is a process in the law known as borrower defense, where students who went to those schools, borrowers who took out federal student loans to attend those schools can apply to get their loans forgiven from the federal government. That has been sort of a big push under the Biden administration to help those borrowers who have had that happen.

In terms of the injunction that you just mentioned, there is a lawsuit pending. And the Fifth Circuit Court of Appeals has enjoined the Department from imposing new regulations that were designed to ease the path to loan forgiveness for those borrowers. So again, sort of a long and tortured regulatory history, but the Department in 2021 undid a series of regulations imposed by then Secretary DeVos to try and ease the path for borrowers.

And that's what is now getting held up in the courts where an organization that represents for-profit colleges has sued to enjoin those rules. And essentially, what they're trying to do is make it harder for borrowers who have been victimized by some of these schools to get relief.

RONDA LEE: Adam, can you hop in here? You just recently settled a lawsuit with one of the major loan servicers. Well, former loan servicers. So they were a former loan servicer for the Department of Education, but they also offered private student loans. Can you talk about what happened with your settlement agreement?

ADAM SHAW: Right. Thank you. We're talking about private student loans, not loans from the government. And Navient was collecting on these loans even after people had gone through bankruptcy. For a very long time, people did not realize, in fact, the judges and the courts and lawyers, everybody thought that student loans of all stripes persist through bankruptcy.

But in fact, certain private student loans do not persist through bankruptcy. And we brought a lawsuit to try to stop Navient from collecting on those loans for thousands of people. And we're successful. We've got a settlement.

Now that discharges the debts for people who went through bankruptcy and who had private student loans that either they went to a non-accredited school or where their loan exceeded the cost of attendance. So it's helpful to a number of students. Not everybody has gone through bankruptcy. Bankruptcy is not necessarily a choice for everybody. But for those that did, we've got the bankruptcy code working now.

RACHELLE AKUFFO: And Adam, I mean, it has been tough because undue hardship is the bar that you basically have to reach in order to qualify for this. But for people who are interested or trying to decide between discharging their loans, what should they know? What are the steps they should take?

ADAM SHAW: So it's important. So for federal loans, typically, they cannot be discharged at bankruptcy unless you could show undue hardship. And for years, that was an impossible threshold to reach. More recently, the Department of Education and Department of Justice have taken the position that you could actually show that if you can't pay the loan in the future and you have stresses on you financially, that you might be able to discharge that loan through bankruptcy.

So there's now an Avenue and a path for even federal loans that was not there before for people. So I think people really need to take a look at their personal situation. And if bankruptcy is right for them, there may be a path now that was not there before.

RONDA LEE: Dan, I'm going to direct this question to you, and I'm going to piggyback off something that Adam mentioned. He talked about non-accredited schools. And when it comes to a lot of these for-profit schools, something that happened last year was the accrediting body was actually disbanded by the Department of Education.

And so you have a lot of these schools that are offering programs that actually aren't accredited for their state or for what they're doing. Can you go into a little bit about how this contributes to the whole predatory defrauding for most of the students that have gone to these for-profit schools?

DAN ZIBEL: Sure. I mean, accreditation is one of the key guardrails that Congress has required of institutions of higher education. And in reality with respect to the federal loan system, schools are actually aren't eligible to even participate in the federal loan system or the Pell Grant system unless they are accredited.

And one of the long time accreditors for-profit education, an organization known as ACICS was actually essentially recognized as a legitimate accreditor by the US Department of Education. And that is one thing we tell folks is you should definitely check to see about accreditation status of a school, particularly if it is not one where it's a sort of a growth of a boot camp industry where they're not participating in the student loan programs. And you just want to make sure that there's some check on it.

But I also want to just note that schools can be accredited, and it's not just even for-profit schools who were seeing some of the problems. There's been a real uptick in recent years of legitimate even highly prestigious institutions offering programs in partnership with some for-profit companies where they are essentially outsourcing the entire education. So you think you're getting an education from XYZ university that's really a top tier internationally known university, when in reality what you're getting is sort of they're licensing their name.

So it's really something that even though that institution is accredited that we encourage people to really do due diligence on some of the programs, particularly some of the programs that are out there that seem a little newer or more flexible. And many of them are excellent. Don't get me wrong. But there are certainly some products out there that really are designed primarily for revenue for the institution and perhaps the company that they're in partnership with.

RACHELLE AKUFFO: Well, due diligence certainly the key there. Appreciate you breaking this down for us. A big thank you to Dan Zibel, Student Defense vice president, and Adam Shaw, partner at Schiller Flexner law firm, and of course, Yahoo Finance's own Ronda Lee. Thank you to you all.