Defining the Brunner test's three parts: time to set a national standard for all three parts to determine when to allow the discharge of federal student loans.

• Author: Smith, Kevin J.

1. INTRODUCTION

   Since the origin of the modern Bankruptcy Code, (1) when federal student loans were dischargeable in bankruptcy, it has become increasingly more difficult to discharge those loans in any bankruptcy proceeding. Federal student loans have become essentially non-dischargeable, absent the showing of undue hardship on the part of debtor to repay those loans. (2)

   Most bankruptcy jurisdictions have incorporated a test in determining whether undue hardship exists from a case out of New York: Brunner v. New York Higher Education Services Corporation (In re Brunner). (3) The Brunner Test has since been adopted by most of the Circuit Courts as the undue hardship standard to determine whether a student/debtor can have their federal student loans discharged in a bankruptcy proceeding. (4) Congress has chosen never to define what exactly undue hardship means, even with all of the changes Congress has made to the Bankruptcy Code over the last forty years, and has decided to leave it for the bankruptcy courts to determine. (5) This has been the major reason, or cause, for the problems with the bankruptcy system regarding the discharge of federal student loans.

   The current standard of determining whether a debtor can discharge their federal student loans has been judicially defined too harshly by most of the bankruptcy courts. The Brunner Test has to be both loosened and clearly defined by the Bankruptcy Code to accommodate the reality of the economic situation in this country. Taking the definition of "undue hardship" away from the judges and courts and clearly stating a standard within the Bankruptcy Code allows a uniform approach to the concept of discharging debtor's federal student loans. This article is not advocating a blanket-discharge policy, but one that will consider the original intent of the Bankruptcy Code, along with the reality of the country's situation.

   This country is headed for a major problem with the amount of federal student loan debt that exists and we must prepare ourselves, as a nation, for what is going to be the reality of the situation. All of the present plans, as discussed below, are attempts to delay, avoid, or ignore the immense situation that is the federal student loan debt in this country. Federal student loan debt is not going away, nor is it shrinking, and it is only going to get worse if we continue to ignore the fact that the massive debt exists and many debtors cannot pay the federal student loans back.

2. FEDERAL STUDENT LOAN DEBTS AND PLANS TO REPAY THEM

   Federal student loans have been around for a very long time, but not as they exist today. The federal student loan program began with the National Defense Education Act of 1958, which established the currently named Perkins Loans program. (6) Later, the Higher Education Act of 1965 established the Stafford Loan program, which provides federal funds for low-interest loans to students to attend college, and is the commonly known federal student loan program today. (7) Under these loan programs, the federal government insures or guarantees the lenders that the federal government will reimburse them for the student loans in the event of a student/debtor's default. (8) Over the decades, the amount of student loan debt students have been borrowing has increased at a dramatic pace. (9)

   The federal student loan debt problem is ever-increasing and only getting worse. Every year the amount of student loan debt is growing and, along with it, the default rate on student loans is rising. (10) We, as a society, have to prepare for the eventual reality of the federal student loan default issue and the impact that it will have on our economy if the debts are not made dischargeable in bankruptcy proceedings. This could result in economic situations where people are not able to spend on consumer goods because they cannot relieve themselves of their federal student loan burden. (11) For example, some believe that this situation has already hindered the housing market recovery in this country. (12)

   The current federal student loan debt is an astonishing one trillion dollars and growing. (13) This amount is greater than the debt on auto loans or even credit cards. (14) It is second only to the amount of mortgage debt in this country. (15) With the costs of higher education continuing to increase faster than the inflation rate, (16) this debt problem is not going to get better with the existing policies in place. The intent of the current policies is to appease, not to directly address, the situation. Granted, there are public policy concerns in allowing federal student loan discharges in bankruptcy--for example, that people would be getting free college educations--but nonetheless, we are going to be forced to address the Issue. (17)

   There are many options and plans that have been presented to the American public, but they appear to be attempts to delay the inevitable federal student loan debt crisis that is looming. Politically, it seems to be a subject matter that no one politician wants to be the first to address. However, one promising recent plan that has been offered is the Income Contingent Repayment ("ICR") plan. (18) The ICR plan, which is only available for those whose student loans are with the federal government, (19) is designed to reduce the normal payment to an amount that can be affordable for the student/debtor. (20) If the debtor's adjusted gross income falls below the federal poverty level, the payment for their student loan would be zero for example. (21)

   The maximum period for this particular plan is twenty-five years and any amount left after that time period would be forgiven or discharged without the need for a bankruptcy proceeding. (22) The twenty-five year period excludes any time for deferments, forbearances, and other approved situations that may apply. (23) Thus, there has to have been twenty-five years of actual payments made before any amount will be forgiven or discharged. However, after this period is completed, the balance of the federal student loans would be extinguished as if it had gone through a bankruptcy proceeding. Nonetheless, this ICR plan has affected bankruptcy courts' determinations of whether a debtor can have his or her federal student loans discharged as an "undue hardship."

   For example, under the current "undue hardship" standard of the Brunner Test, failure to pursue the ICR repayment option when it would have lowered payments is cause for denying the discharge of federal student loans. (24) However, other courts have noted that a debtor being eligible for the ICR, and not participating, does not automatically prevent them from getting their federal student loans discharged through bankruptcy. (25) It seems to be, however, a strong determining factor that the courts have considered in determining "undue hardship." (26)

   Another plan is called the Public Service Loan Forgiveness ("PSLF") Program. (27) This program will discharge any remaining debt the student/debtor may have after ten years of full-time employment in a public service job. (28) During this ten-year or 120 month payment period, the debtor has to have made payments consecutively and without default. (29) The remaining balance is forgiven without tax implications. (30)

   The courts have held that if the debtor does not attempt to use this-plan, if available to the debtor, it shows a lack of good faith in attempting to repay their federal student loans. (31) The PSLF plan is different from the ICR in that the PSLF is specifically for those in public service. (32) The ICR plan is essentially for anyone who has federal student loans currently being held by the federal government.

   Yet another repayment plan, and the most recent, is the Income-Based Repayment ("IBR") plan. (33) This plan is very similar to the ICR plan in that both programs cap the monthly payment at a percentage of the debtor's discretionary income. (34) The difference is the definition of discretionary income. (35) There is no minimum payment under the IBR plan. (36) For most borrowers, the IBR plan is better than the ICR plan because the IBR's definition of discretionary income caps the monthly payments at a much lower percentage of the debtor's income. (37) However, it must be noted that under the ICR or IBR plans, the debtor has to pay taxes on the amount of their federal student loans being discharged. (38) Furthermore, failure to apply for the IBR plan may be considered a lack of good faith efforts to repay federal student loans. (39)

   The IBR plan is an excellent option for debtors that are having problems paying their federal student loans. The possibility of paying zero dollars each month will help those that need this option. There have been plenty of bankruptcy petitioners that qualified for zero dollars monthly payments under the IBR plan. (40) As with the other plans, failure on the debtor's part in attempting to establish a repayment plan using the IBR plan could cause the court not to discharge the student loans. (41) Nonetheless, this plan does allow the debtor to avoid paying their federal students loans, possibly in their entirety. This result sounds similar to the result of having them discharged in a bankruptcy proceeding.

   While the plans mentioned above provide some relief, they are essentially trying to "mask" what the Bankruptcy Code could provide: relief from paying back the federal student loans. No matter what plan we adopt, or which new plan Congress or the President may introduce, we have essentially two options as a society. The first option is to reduce the amounts provided in the federal student loan program, which may force schools to control their costs. This approach would be very unpopular. The second option is to provide a way for student/debtors that need the help, to discharge their student loans in a bankruptcy proceeding. We should do the latter of these options first, and then address the former with more...