The Long Strange Trip to a Certainty of Hopelessness: The Legislative and Political History of the Nondischarge of Student Loans in Bankruptcy.

AuthorGrohsgal, Bruce

ABSTRACT

The bankruptcy statute bars the discharge of a student loan unless the debtor proves "undue hardship." Courts have construed this to mean perpetual impoverishment or a "certainty of hopelessness." This harsh restriction stands in stark contrast to the elemental bankruptcy policy of a fresh start and furthers no countervailing policy. The stated purpose of the 1998 enactment, rather, was to obtain a small budget offset.

The undue hardship requirement was first enacted in 1976 but applied then only to the first five years of the loan repayment term. In 1990, it was extended to the first seven years of the repayment period, after which the loan was freely dischargeable in bankruptcy. The purpose was to prevent recent graduates with rosy futures but few assets from abusing bankruptcy law, by which the federally backed student loan program might be undermined. The evidence of any such abuse, even then, was uncertain.

In 1998, Congress extended the undue hardship requirement from seven years to borrowers' lifetimes. It did not ask whether bankruptcy abuse was occurring under the seven-year undue hardship rule. Instead, the enactment was part of a bargain made at the end of a long political war between Speaker T[cwt Gingrich and President Bill Clinton for the stated purpose of obtaining a $56 million per year budget offset to ensure the "budget neutrality" of the extensive Higher Education Amendments of 1998. The result of the lifetime rule was to obscure the futures of student borrowers unable to repay or discharge their debts.

This article recounts the unlikely legislative and political history of this law and recommends its reconsideration.

CONTENTS

INTRODUCTION I. THE NEARLY UNSCALABLE WALL TO THE DISCHARGE OF A STUDENT LOAN IN BANKRUPTCY A. The Brunner Rule and Its Three Prongs B. The Totality of the Circumstances Standard C. The Effect of the Availability of Income-Based Repayment Programs II. JUDICIAL REASONS FOR THE HIGH BAR A. Pre-1998 Reasons for the High Bar B. Post-1998 Reasons for the High Bar III. THE ORIGINS OF THE FEDERAL STUDENT LOAN PROGRAM IV. THE LEGISLATIVE HISTORY OF THE FIVE--AND THEN SEVEN-YEAR UNDUE HARDSHIP REQUIREMENT A. The Education Act of 1976 B. The Bankruptcy Reform Act of 1978 C. The Crime Control Act of 1990 V. THE ENACTMENT OF THE LIFETIME UNDUE HARDSHIP REQUIREMENT IN HISTORICAL CONTEXT A. The Bankruptcy Wars of the 1990s B. The Budget Wars of the 1990s 1. Clinton and Gingrich 2. The Budget Wars C. The Higher Education Amendments of 1998 D. The Budget Wars--Coda VI. REVISITING THE LIFETIME BAR TO THE DISCHARGE OF STUDENT LOANS A. Restoring the Bankruptcy Balance for the Discharge of Student Loans Under [section] 523(a)(8) B. Responses to Some Objections to Amending [section] 523(a)(8) 1. The Budget 2. Tuition Increases 2021) 3. Congress Has Left it to the Courts 4. Confirmation Bias--Anecdotal Evidence of the Freeloading Debtor VII. CONCLUSION INTRODUCTION

"I couldn't afford to learn it," said the Mock Turtle with a sigh. "I only took the regular course."

"What was that?" inquired Alice.

"Reeling and Writhing, of course, to begin with," the Mock Turtle replied; "and then the different branches of Arithmetic --Ambition, Distraction, Uglification, and Derision." (1)

Student loans are almost impossible to discharge in bankruptcy. The Bankruptcy Code (2) provides in [section] 523(a)(8) that student loans can be discharged only if the debtor proves that repaying them would be an "undue hardship." (3) Courts applying [section] 523(a)(8) regularly require the debtor to prove a "certainty of hopelessness." (4)

This high bar to the discharge of a student loan was made applicable to a student's lifetime in 1998. The lifetime rule was enacted as a step in a legislative process for the stated purpose of ensuring the "budget neutrality" of the Higher Education Amendments of 1998, an extensive higher education reauthorization act. (5) The historical record indicates that little consideration was given to the possible effects of the lifetime rule on student debtors, their families, or the economy. The budget offset obtained by the change in bankruptcy law, as estimated by the Congressional Budget Office ("CBO"), was $56 million per year. (6)

This article recounts the legislative and political history that led to the passage of the 1998 law, which came toward the end of an ugly period in U.S. political history during which the federal budget deficit became a prime territory for partisan battles. Given the political atmosphere, it is no surprise that legislators and the White House were distracted from and did not consider the plight of student debtors. In light of this history, this article urges Congress to revisit and revise the current statutory lifetime undue hardship requirement and recommends that courts reconsider construction of the term "undue hardship."

Congress first imposed the undue hardship requirement for government-backed student loans in 1976. The law originally made the loans non-dischargeable for five years after they first became due, unless the debtor could prove undue hardship. After that five-year period, a student loan was freely dischargeable with most other unsecured claims by anyone willing to accept the consequences of filing for bankruptcy. The undue hardship requirement of 1976 applied only in a chapter 7 bankruptcy case. Because the requirement did not apply in chapter 13, a debtor could discharge a student loan--without fully repaying it--by making payments from her earnings over the five-year term of a chapter 13 plan.

Congress enacted the 1976 law requiring proof of undue hardship for the first five years of the loan's repayment period in response to perceived bankruptcy abuses. Some borrowers, the story went--who shortly after graduating had little if any property to lose in a chapter 7 bankruptcy proceeding--sought to walk away from loans that they could repay. (7) The five-year undue hardship rule was reenacted in the 1978 Bankruptcy Reform Act, which became known as the Bankruptcy Code. (8)

Congress left the task of defining "undue hardship" to the courts. Most courts follow the Brunner (9) rule. In Brunner, the Second Circuit first set forth three prongs that a debtor must prove to discharge student loan debt: (1) the debtor has a present inability to maintain a minimum standard of living for herself and her dependents while also repaying the loan; (2) that inability is likely to persist "for a significant portion of the repayment period of the loan"; and (3) the debtor has made a good faith effort to repay the loan. (10) Courts have interpreted these requirements to require proof of perpetual impoverishment resulting from a severe physical disability and the inability to work at any job, or a "certainty of hopelessness." (11)

Congress has made it progressively more difficult to discharge a student loan in bankruptcy. First, by a provision attached to the Crime Control Act of 1990, (12) Congress extended the five-year requirement to seven years. (13) Then, in 1998, Congress removed any temporal limitation, meaning that a debtor had to prove "undue hardship" regardless of how much time had lapsed since the loan first became due. Congress closed the post-seven-year discharge window by a single provision among the 160+ sections of the Higher Education Amendments of 1998. (14) The stated purpose of that provision of the Act was not to prevent abusive bankruptcy filings by student borrowers or to protect the federal student loan program. Instead the extension of the undue hardship requirement to a borrowers' lifetime was added by the conferees "in the effort to ensure the budget neutrality of th[e] bill." (15)

This tale of how student loans became nearly impossible to discharge in bankruptcy begins in an expansive era of U.S. history, when Congress recognized a growing popular awareness in the value of higher education. Congress sought through the federal student loan program to extend the opportunity to attend college and university more broadly to lower--and middle-income families. (16)

The legislative chronicle of this article ends in the late 1990s, a political era in in which--to use the Mock Turtle's terms--"ambition, distraction, uglification, and derision" largely supplanted policy considerations. The 1998 law that replaced the promise of educational opportunity with a lifetime burdened by debt for many student loan borrowers was not based on any policy regarding threats to the viability of the student loan program or of concern about the behavior of individual borrowers. The law's stated purpose of ensuring the "budget neutrality" of a comprehensive federal education bill was a mere distraction--a branch of learning which Carroll's Mock Turtle also studied--from consideration of the likely effect on students who could not repay their loans. Based on CBO estimates, the budget surplus had grown to as much as $55 billion at the time, and the budgetary saving from this severe change was $56 million per year. (17) The legislative and executive branches' combat of the day, budget neutrality, has affected borrowers for decades.

Part I of this article describes the nearly unscalable wall facing borrowers who seek to discharge student loans under the Brunner rule adhered to by most courts, and the almost identical "totality of the circumstances" standard followed by a few others.

Part II considers the legislative purpose that the courts have ascribed to the lifetime undue hardship rule.

Part III describes the origins of the federal student loan program in the National Defense Education Act of 1958--in which Congress expressly declared that the security of the nation required "the fullest development of the mental resources and technical skills of its young men and women" (18)--and the Higher Education Act of 1965, the purposes of which included assuring that no student with ability and financial need would be denied an opportunity for a...

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