Student Loan Discharge: Reevaluating Undue Hardship Under a Presumption of Consistent Usage

• Publication year: 2019

Student Loan Discharge: Reevaluating Undue Hardship Under a Presumption of Consistent Usage

Ashley M. Bykerk

STUDENT LOAN DISCHARGE: REEVALUATING UNDUE HARDSHIP UNDER A PRESUMPTION OF CONSISTENT USAGE

ABSTRACT

An increasing number of Americans are suffering from financial distress caused by educational debt. Some of those individuals seek relief from that distress through the bankruptcy system, where they must establish that repaying their educational debt would impose an undue hardship in order to obtain a discharge of such debt. The focus of this Comment is § 523(a)(8) of the U.S. Bankruptcy Code, which sets forth educational debt as an exception to bankruptcy discharge unless the repayment of student loan obligations imposes an "undue hardship." In drafting this section, Congress did not define the term "undue hardship, " thereby empowering the courts to determine what constitutes undue hardship and the circumstances that deserve forgiveness of educational debt. As a result, courts have developed a variety of tests to provide a framework for determining whether a debt should be dischargeable.

Congress's decision to condition the relief of educational loans on the application of a vague and indeterminate standard has proved to be problematic for various reasons. One solution, not yet discussed by courts and commentators, is to look to other federal statutes and regulations implementing the undue hardship standard to evaluate the application of the standard and consider how those applications can inform the undue hardship analysis in the bankruptcy context.

By evaluating the undue hardship standard in the context of public benefits, employment discrimination, financial aid eligibility, tax payment extensions, and discovery in civil procedure, this Comment supports the conclusion that the primary inquiry into a debtor's undue hardship claim must focus on the debtor's current financial circumstances without undue regard to pre-bankruptcy conduct or assurance of persisting financial distress. Any definition Congress provides to "undue hardship" in § 523(a)(8) of the Bankruptcy Code should include factors that evaluate the future livelihood of the debtor if she is denied bankruptcy relief based on the debtor's current financial circumstances.

INTRODUCTION

Student loan debt in the United States has been on a continual rise becoming the second highest consumer debt category with more than forty-four million

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borrowers holding over one and a half trillion dollars in student loan debt.¹ This figure represents more than two and a half times the amount of student loan debt owed just a decade earlier.² These are the statistics driving the literature describing the student loan debt crisis, a crisis driven by rising tuition rates that exceed student financial aid and family income necessary to cover educational costs, forcing students to rely on student loans to finance higher education.³ Educational loan borrowers have increasingly found themselves unable to repay their student loans as indicated by student loan default rates, resulting in negative effects to an individual's financial well-being and leading to financial distress.⁴

While there are many potential solutions to the rising costs of tuition and resulting dependency on student loans, this Comment views bankruptcy as one solution to the financial distress that students with burdensome student loans face because of the policy objectives driving bankruptcy law. Bankruptcy law is a statutory mechanism for individuals and entities burdened by financial obligations to discharge their debts.⁵ Two main public policy objectives govern the purpose behind bankruptcy law. First, bankruptcy provides a mechanism for creditor repayment through a liquidation process or through a repayment plan.⁶ Second, debtors receive relief from creditors and obtain a fresh financial start that is unburdened by the pressure and struggles of onerous pre-existing debts.⁷

The focus of my Comment is § 523(a)(8) of the U.S. Bankruptcy Code, which determines a debtor's ability to discharge student loan debt if the repayment of student loan obligations imposes an "undue hardship."⁸ My Comment examines the impact of Congress's decision to delegate the task of interpreting the undue hardship exception to the judiciary and argues that the statutory interpretation tool of consistent usage provides a viable means for

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reinterpreting the phrase "undue hardship" to create a consistent and fair standard to help courts determine whether a student debtor's circumstance constitutes undue hardship that necessitates discharge of the educational debt. My research involves researching relevant federal statutes and regulations to determine how the phrase "undue hardship" is interpreted and applied to determine whether that definition and application can inform courts on how the standard may be used in the context of student loan discharge proceedings to create consistent treatment of student-loan debtors.

First, this Comment provides background on the evolution of student loan programs and the bankruptcy system. Next, this Comment provides the legal doctrine behind tools of statutory construction, including the presumption of consistent usage, that I use to support the concept of looking across federal laws to discern common threads among the way undue hardship is interpreted and applied to help inform the use of the standard in the bankruptcy context. My Comment then analyzes the various federal provisions using the undue hardship standard by describing the provisions, analyzing case law decisions interpreting the standard, and discerning key points that can be used to inform the use of the standard in determining whether student loans may be discharged in bankruptcy. Finally, this Comment proposes some important policy considerations that support the idea that the undue hardship standard in the bankruptcy context needs to be reevaluated by circuit courts that are continually faced with the decision of what constitutes an undue hardship to warrant the discharge of student loan debt.

I. BACKGROUND

Student loan programs were originally intended as a program of last resort for college students seeking to finance their education, and only the most needy students qualified for a loan.⁹ The purpose surrounding the creation of the first student loan programs, around the time of Lyndon Johnson's "war on poverty," was to reduce financial barriers and overcome the equalities of opportunity among potential college enrollees.¹⁰ The result was widespread demand for additional student financial aid, which Congress responded to by enacting the Middle Income Student Assistance Act, which made federal student loans available to students with less regard to need.¹¹ Among other expansions of

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student financial aid programs and policy, student borrowing rates increased drastically. The evolution of student loan programs and the impact that it had on cost and accessibility of higher education is responsible for creating the so-called "Indentured Generation" of student borrowers, a nickname that scholars have given students that will likely be burdened with student loan debt for much of their lives.¹²

Around the same time Congress was expanding the student loan program, Congress also began the process of ending the opportunity to discharge student loan debt through bankruptcy due to fears of bankruptcy abuse by student debtors.¹³ Prior to the current Bankruptcy Code, student loans were not treated differently from any other dischargeable debt. The practice changed with the passage of the Education Amendments Act of 1976, which prohibited discharge of student loans in bankruptcy for the first five years of loan repayment unless the debtor could establish undue hardship.¹⁴ The 1978 Bankruptcy Code endorsed the five-year bar against discharge of student debt.¹⁵ In 1990, the student loan discharge exception was extended to seven years.¹⁶ Then, in 1998, the Code was amended so that federally guaranteed student loans could not be discharged unless the debtor could prove undue hardship.¹⁷ With this historical context in mind, tension continues to exist between federal student aid programs that encourage students to borrow to access to higher education, and federal bankruptcy law that characterize educational debts as an exception to the general rule that discharge forgives pre-bankruptcy debts, unless the educational debts impose undue hardship.

Under the current provision governing the discharge of educational loans, a debtor availing herself of the bankruptcy system must establish that repaying her educational debt would impose an undue hardship in order to obtain a discharge of such debt.¹⁸ An important consideration by a student loan borrower who wishes to discharge pre-bankruptcy educational debts is what she must show to make a claim of undue hardship. The relevant provision, however, does not provide a definition or standard to explain what constitutes an "undue hardship" that warrants discharge of educational loans.¹⁹ The legislative history of the

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section also fails to precisely specify how courts should determine whether a debtor qualifies for a discharge based on an undue hardship.²⁰ The task of interpreting undue hardship and establishing the conditions that warrant the discharge of educational loans has consequently fallen to the federal judiciary. As a result, courts have developed a variety of tests to provide a framework for determining whether an individual's educational debt may be discharged.²¹ Amidst these varying tests, courts have disagreed regarding the threshold for when an education loan obligation is an undue hardship and what exactly what a debtor must prove in order to discharge a student loan on undue hardship grounds.²²

The vast majority of courts, including nine of the country's thirteen federal circuit courts, have interpreted "undue hardship" to require the debtor...