CHAPTER 6, C. Should Congress Abrogate Brunner's Criteria for Determining "Undue Hardship" Under § 523(a)(8)?

• Jurisdiction: United States

C. Should Congress Abrogate Brunner's Criteria for Determining "Undue Hardship" Under § 523(a)(8)?

ABI Journal

March 2019

Cheryl D. Cook

Potestivo & Associates, PLLC

Rochester Hills, Mich.

Since the 1980s, Brunner¹ has provided a useful standard for evaluating requests to discharge student loans based on undue hardship. The criteria identified in that decision allows courts to balance the objectives of maintaining availability of student loan funding for many who could not otherwise afford higher education, with providing avenues of relief for students who are under an overwhelming burden of debt.

Although most districts have adopted the Brunner test, modern bankruptcy courts are examining whether a partial discharge of student loans is an effective compromise. Therefore, the question must be asked: Is it time for Congress to abrogate Brunner's criteria for determining "undue hardship" under 11 U.S.C. § 523(a)(8)?²

Anatomy of Student Lending

A brief review of how student loan debt arises in the first place might provide a better understanding of why Congress originally decided to treat student loans differently from other unsecured debt by excepting them from discharge in bankruptcy unless a successful adversary proceeding has been filed. In general, student loans (particularly government-subsidized student loans) are granted without a review of a student borrower's credit score.

In exchange for lower "underwriting" eligibility standards, federal student loan lenders get the added security of higher barriers to a discharge of student loan debt. Eligibility is based on demonstrated financial need, U.S. citizenship (or eligible non-citizenship), a valid Social Security number (subject to limited exceptions), registration with Selective Service (for males between the ages of 18-25), and satisfactory academic progress in college or career school.³

Federally guaranteed student loan programs, as outlined in the laws establishing them, were intended to (1) "ensure a sufficient supply of well-trained, competent professional and technical personnel, and (2) allow every person the fullest possible educational opportunity by making loans available to those who could not otherwise obtain a loan because of their age and lack of collateral or borrowing history."⁴ While federal loans provide a source of funds without regard for credit worthiness, private student loans are generally credit-based, and the lender's assessment of creditworthiness influences the interest rate and other terms. Despite their use of credit-evaluation criteria, under the most recent amendments to the Bankruptcy Code private student loans also enjoy the protections of heightened standards for dischargeability.⁵

Bankruptcy Law and Student Debt

From enactment of the Bankruptcy Act of 1898⁶ until 1976,⁷ debt classified as what we now call "student loans" was treated and subject to discharge in the same fashion as any other unsecured loan. In 1976,⁸ § 523(a)(8) was enacted as part of the Education Amendments of 1976⁹ to exempt student loans from a bankruptcy discharge during the first five years, absent a showing of undue hardship, based on reports that students took out loans to fund their education, then sought to discharge their liability for repayment shortly after graduation so that they could begin their careers debt-free.¹⁰

More specifically, the 1973 Report of the Commission on the Bankruptcy Laws of the United States¹¹ pointed out that while an increase in bankruptcy filings was a "natural if not inevitable result" of increased availability of consumer credit, "the easy availability of discharge from educational loans threaten[ed] the survival of existing educational loan programs."¹² The threat of making loans that would never be repaid, in light of the original goal of making educational funding available to people who might otherwise be...