CHAPTER 3 STRATEGIES FOR STUDENT LOANS
| Jurisdiction | United States |
CHAPTER 3: STRATEGIES FOR STUDENT LOANS
Student loans are becoming one of the largest concerns for consumers in this country, and practitioners are becoming more and more creative in how the bankruptcy laws may alleviate the pressure. Student loan debt has grown to $1.41 trillion in the United States, second only to mortgage debt as the largest source of household debt in the country, with over 10 percent delinquent or in default.
Yet as we all know, student loans are largely not dischargeable under 523(a)(8) and the interpreting cases. Recent cases have continued to apply and consider the Brunner test, and provide insight on how attorneys may be able to successfully bring a 523(a)(8) action under the right circumstances. Courts appear to be more open to alleviating the burden on consumers, such as through relying on income-based repayment solutions.
Providing for separate classification in chapter 13 plans may allow debtors to exit a bankruptcy without finding themselves owing more in student loan debt than when they started the case. Courts differ on whether separate classification is permissible or unfairly discriminates.
A. Living in Borrowed Times
The Changing Context of Student Loan Discharge
ABI Journal
February 2018
Written by:
Benjamin A. Jacobs
Askew & Mazel, LLC
Albuquerque, N.M.
Treatment of insolvent debtors in America has evolved from locking colonial debtors in debtor prisons, to the availability of bankruptcy discharge for business debts incurred by entrepreneurs, to extension of the discharge to consumer debts as well.1 Throughout that history, lawmakers provided for discharge of debts that allows the honest-but-unfortunate debtor to remain productive, while forbidding discharge of debts incurred with perceived moral blameworthiness.2 Today, prohibitions on discharge of debts incurred for morally blameworthy acts manifest themselves in 11 U.S.C. § 523(a), which excepts certain types of debts from discharge.3
Section 523(a) excepts debts resulting from morally blameworthy acts, including debts resulting from the acts of not filing tax returns, obtaining credit by fraud, embezzlement, larceny, committing fraud in a fiduciary capacity, intentional torts, causing personal injury or death by intoxicated driving, and securities fraud.4 Section 523(a)(8) adds to that list the act of taking an educational loan and failing to pay it back, unless excepting the debt from discharge would cause an "undue hardship" on the debtor.5 Moral blameworthiness, while not the only justification for excepting educational debt from discharge,6 is nonetheless the only justification that Congress identified when it first placed specific restrictions on discharging educational debt in 1976.7 Since then, the context of student borrowing has substantially changed.
Not only do consumer advocates argue that restrictions on student loan discharge are unfair to debtors, but others now argue that restrictions on the discharge, and the lax lending policies the restrictions protect, enable educational institutions to raise tuition, paid for by students and their families out of more and more debt.8 As the landscape of student borrowing continues to become more unfavorable to students, it is increasingly difficult for courts to point the finger of blame at debtors alone for their hardships.
Restrictions on Borrowing Grow Tighter over Time
From the time that the federal government began student loan programs in the late 1950s as a response to Cold War competition9 until the present, restrictions on discharge of student loans have tightened from no restrictions specific to student loans to no discharge absent a showing of undue hardship. The earliest restrictions, enacted in 1976,10 survived into the Bankruptcy Code of 1978 and applied only to loans from the government and not from private lenders, and only if two circumstances were met: an educational debt was nondis-chargeable if (1) the loan was less than five years old and (2) it would not cause an undue hardship on the borrower.11
The five-year waiting period was a significant protection for the federal government's student loan program that was not given to other unsecured lenders, but still allowed honest-but-unfortunate student borrowers access to the fresh start five years into repayment. Congress also allowed discharge to student borrowers facing undue hardships. According to the legislative history, Congress allowed this exception because it recognized that "in some circumstances, the debtor, because of factors beyond his reasonable control, [might] be unable to earn an income adequate both to meet the living costs of himself and his dependents and to make the educational debt payments."12
From this relatively balanced statutory framework, new rules have made student loan discharge increasingly limited. In 1987, the Second Circuit created the Brunner test for undue hardship.13 The test (the majority rule that was adopted in nine circuits) is noted for its narrowness in finding undue hardship, where, in some formulations, discharge for undue hardship is limited to circumstances that demonstrate a "certainty of hopelessness."14 In 1990, Congress extended the period of nondishargeability absent undue hardship from five years to seven years and brought a wider array of educational benefits under the umbrella of nondischargeability.15 In 1998, Congress made a showing of undue hardship a requirement beyond seven years, for the debtor's lifetime.16 In 2005, Congress extended the exception from discharge protection to educational loans made by private lenders, as well as loans originating from government programs.17
Education Costs and Student Borrowing Grow over Time
The costs of attending a public, four-year college, inclusive of tuition and fees and room and board, and in terms of 2016 dollars, rose 242 percent from $8,307 to $20,092 between the data-collection years 1971-72 and 2016-17.18 However, the trend of increase is constant only after 1981-82. Between 1971-72 and 1981-82, the yearly cost of attending a public university actually decreased from $8,307 to $7,423.19 In contrast, from 1996-97 to 2016-17, the cost nearly doubled, from $10,950 to $20,090.20 The overall trend for private nonprofit colleges is similar, where yearly costs in 1971-72 were $17,318, dipped slightly in the next decade, and have risen in 2017 to $45,365.21
As the cost of attending college has risen dramatically since Congress and the courts established rules for student loan discharge, so too has student loan debt, both overall and in terms of average student debt. The Federal Reserve Bank of New York provides historical data on student loan debt dating back to 2003. A look at just that period, from 2003 (slightly before the last change to § 523(a)(8)) to 2017, shows significant increases in student borrowing.
In 2003, the amount of outstanding student debt was $241 billion.22 In 2017, with more than $1.3 trillion in outstanding student loan balances, student loans have become the second-largest source of household debt in the U.S., trailing only mortgage debt.23 While some of the increase in overall student debt is attributable to higher enrollment, each student is having to borrow much more to attend college.
Student enrollment increased 62 percent between 1990-91 and 2012-13, yet annual student loan issuance increased 352 percent over the same period, from $24 billion to $110 billion.24 Among undergraduate borrowers who graduated in 1992-93, the typical borrower exited school with $12,434 in student loan debt.25 However, the typical undergraduate borrower who graduated in 2011-12 left school with $26,885 in student loan debt.26 A large-but-decreasing portion of the outstanding student loan debt balance is held by borrowers who owe less than $10,000, while a small-but-increasing portion of that balance is held by borrowers who owe more than $100,000. In 2005, 55.5 percent of borrowers owed less than $10,000, and 1.7 percent owed more than $100,000.27 In 2015, those percentages had changed to 37.8 percent owing less than $10,000, and 4.5 percent owing more than $100,000.28
While borrowers who achieve a degree continue to see a benefit in wages and socioeconomic outcomes compared to individuals who do not earn post-secondary degrees, increased borrowing is eating away at that benefit. Between 1990-2015, median wages for student borrowers who earned a bachelor's degree increased 1.6 percent from $42,342 to $43,000.29 Meanwhile, within that same group, median debt increased 163 percent, from $12,110 to $31,941.30
Finally, borrowers are increasingly unsuccessful at repaying the amounts that they borrowed. Between 2003-17, the percentage of borrowers in a repayment status of 90 or more days delinquent rose from 6.13 to 11.22.31
The data presented in this article does not make it clear whether, how or to what degree restrictions on student loan discharge have driven increased costs and poorer outcomes for student borrowers. However, the data does show that today's students will be burdened by significantly more debt without the benefit of a significant increase in wages. Even when comparing the 2017 landscape to the landscape at the turn of the 21st century, shortly before Congress made restrictions on student loan discharge their most severe in 2005, total outstanding student debt has increased nearly five times, and the cost of attending college and rates of 90-day delinquencies have nearly doubled.
Honest Efforts Result in Undue Hardship
As others have discussed, courts are trending toward easing the standard of "undue burden,"32 and the popular misconception that "student loans can't be discharged in bankruptcy" is become less true as more courts recognize more circumstances where honest debtors do not stand alone in bearing blame for hardship. One 2017 case provides an illustration.
The debtors in Educational Credit Management Corp. v. Murray were physically and mentally healthy, married debtors...
To continue reading
Request your trial