Unlike any other consumer debt, student loans are not dischargeable through the normal bankruptcy process. Instead, for any student loan that satisfies one of three statutory criteria, borrowers may only obtain a discharge if they prove that repayment would impose an "undue hardship." This Article argues that courts have misinterpreted the scope of these statutory criteria. Specifically, by adopting a reading of the term "educational benefit" that conflicts with the statutory text, the legislative history, and the policy rationales underlying the Bankruptcy Code, courts have misclassified billions of dollars of student loan debt and prevented many borrowers from obtaining the financial relief to which they are entitled.
TABLE OF CONTENTS Introduction I. The Exceptions to Student Loan Discharge A. Federal and Nonprofit Loans B. Educational Benefits C. Qualified Education Loans II. The Meaning of Educational Benefit A. Text B. Legislative Intent C. Policy Consequences Conclusion INTRODUCTION
America is barreling toward a student loan crisis. From politicians (1) and journalists, (2) to scholars (3) and judges, (4) and even to celebrities, (5) it seems almost everyone is in agreement that educational debt is out of control. (6)
The widespread concern over this issue is easy to understand. At present, Americans owe more than 1.5 trillion dollars in student loan debt (7)--an amount that has tripled in the last decade and now exceeds both automotive and credit card debt. (8) Despite the troubling increase, there is an even more pressing issue: the low repayment rate. Only sixty percent of student loans are in active repayment, (9) and a full eleven percent are in default. (10) All told, these bleak statistics make it impossible to deny that educational debt is a significant problem in the United States. (11) Disagreement arises, however, over the potential remedies.
If student loans were like any other consumer debt, a first-pass solution to the problem would be obvious. Individuals in need of relief could simply file for bankruptcy. Student loans, however, are not like any other consumer debts. Instead, they are subject to a number of restrictions that prevent courts from granting discharges through the normal bankruptcy process. Specifically, if a student loan satisfies one of three statutory criteria, a borrower can only discharge the debt through a showing of "undue hardship."
In reviewing how bankruptcy courts have implemented this statutory scheme, lawyers and scholars alike have advanced two propositions: (1) that the criteria for exemption are so broad as to encompass all educational debts (12) and (2) that virtually no one is able to prove undue hardship. (13) My research challenges this prevailing view of the student loan bankruptcy system.
In a previous article, I refuted the second claim by showing that many debtors are able to satisfy the undue hardship standard. (14) That study gathered a nationwide sample of student loan bankruptcy filings and found that approximately forty percent of those who seek to discharge their student loans through bankruptcy are successful. (15) The central problem, that piece concluded, is that so few student loan debtors in bankruptcy take the necessary steps to request an undue hardship determination. (16) Many more would be successful if they tried.
This Article shifts the focus to the first claim--namely, that the student loan discharge exceptions encompass all educational debts. Upon reviewing the cases, I find that this statement does, in fact, capture the reading advanced by a majority of bankruptcy courts. That, however, is not the full story. The textual language, the provision's legislative history, and the policy rationales underlying the Bankruptcy Code all point towards an alternative interpretation of the statute.
The primary source of the problem is the misreading of one short phrase: "educational benefit." Whereas all factors indicate that this phrase should be understood in a narrow, semi-technical sense, a majority of courts have read it expansively to mean any loan that an individual uses for educational purposes. By adopting this broad reading, courts have prevented honest debtors from utilizing the protections of bankruptcy. All manner of student loans that should have been discharged--such as loans for unaccredited schools, loans for tutoring services, and loans that exceed the cost of attendance for college--have been swept up in this interpretation.
Although this Article's argument, if accepted, would lead to the discharge of many types of educational debts, it is important to note that it would leave untouched several of the largest categories of student debt--such as educational loans from the government, educational loans from non-profit organizations, and qualified education loans from private lenders. Despite not altering the status of these debts, my proposed reading of educational benefit has a broad scope and would lead to the reclassification of billions of dollars of student loan debt.
This Article proceeds in two parts. Part I lays out the three student loan exceptions contained in the Bankruptcy Code and discusses how they have been interpreted by the courts. Part II argues that the broad reading of "educational benefit" is incorrect and presents an alternative, narrower reading that is supported by the statutory text, the legislative history, and the Bankruptcy Code's policy rationales. Ultimately, if courts adopt the narrow reading of "educational benefit," they will not only be exhibiting fidelity to the text and congressional intent but will also be closing a significant access-to-justice gap.
THE EXCEPTIONS TO STUDENT LOAN DISCHARGE
The current iteration of the law governing student loan discharges was enacted as part of the 2005 Bankruptcy Abuse and Consumer Protection Act. The relevant statutory language reads as follows:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt....
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for--
(A)(i)an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii)an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual. (17)
There is a lot to parse in this excerpt. For current purposes, however, the most important point is that not all student loans are excepted from discharge. The exemption applies only to three categories of educational debt (18): (1) government and nonprofit-backed loans and educational benefit overpayments, (2) obligations to repay funds received as an educational benefit, scholarship, or stipend, and (3) qualified education loans. (19) Unless an educational debt falls within one of these classifications, it is dischargeable through the normal bankruptcy process. (20)
I discuss the scope of these exceptions later in this Part, but for now it is worth mentioning two procedural features that bear on the determination of whether a student loan is excepted from discharge. First, at the initial stage, the creditor has the burden of proving both the existence of the debt and that the debt meets one of the statutory exceptions to discharge. (21) Courts uniformly agree that "the initial burden is on the lender to establish the existence of the debt and to demonstrate that the debt is included in one of the ... categories enumerated in [section] 523(a)(8)." (22) Not until the creditor has satisfied these burdens does the burden of proving undue hardship fall upon the debtor. (23) Too often, however, debtors simply concede that their student loan debt is nondischargeable absent a showing of undue hardship. (24) This action relieves creditors of a significant burden and, in doing so, exempts many loans from discharge that otherwise would be entitled to discharge.
The second issue worth highlighting with respect to the interpretation of this statute is that the exceptions to discharge must be construed narrowly. (25) Courts have repeatedly held that such a construction of the statute is necessary "in order to preserve the Bankruptcy Act's purpose of giving debtors a fresh start." (26) If judges were to read the exceptions broadly, they would "frustrate this fundamental policy." (27) Therefore, to avoid this problem, "[t]he reasons for denying a discharge ... must be real and substantial, not merely technical and conjectural." (28) In the remainder of this Part, I explore the manner in which courts have interpreted these three provisions.
Federal and Nonprofit Loans
Section 523(a)(8)(A)(i) excepts from discharge any "educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution." (29) As you can see, there are two different discharge exceptions in this provision: "loans" that are backed by the government or nonprofit institutions and "educational benefit overpayments" that are backed by the government or nonprofit institutions. (30)
With regard to the former, courts have held that "[t]his language applies to all situations of student loans funded by the government or nonprofit institutions," (31) and that "for there to have been a loan 'there must be (i) a contract, whereby (ii) one party transfers a defined quantity of money, goods, or services, to another, and (iii) the other party agrees to pay for the sum or items transferred at a later date." (32) This is a straightforward exception that is designed to protect...