A newly introduced bill in Congress would make student loans dischargeable in bankruptcy, as they were decades ago.
The bi-partisan bill is sponsored by Democrat John Delaney of Maryland and Republican John Katco of New York.
Any change to the law touching discharging student loans is a long way down the pike. But this is a start.
And start we must when student loan debt debt is $1.4 TRILLION dollars, dwarfing outstanding credit card debt.
That debt suppresses home buying; family formation; and entrepreneurship.
I heard a telling comment from another bankruptcy lawyer testifying to the ABI Commission on Consumer Bankruptcy Law: how is it that we allow the discharge of income taxes after the passage of time but not student loans?
How?
History of student loan discharge
It’s important to remember that student loans have not always been a life sentence. In the 80’s, a student loan was dischargeable when it had been in pay-status for 5 years. In 1990, the pay-period element of dichargeability was extended to 7 years.
That required that the borrower make an effort to pay the loan.
In 1998, the rules changed. A federally insured student loan could only be discharged if the borrower could prove that repayment constituted “undue hardship”.
As if that wasn’t harsh enough, the amendments of 2005 made privately funded student loans non dischargeable in bankruptcy.
Private student loans are as poisonous a debt as you can image: made at market rates of interest they ensnare students and their families, without income-based repayment plans or procedures to rehabilitate the loan.
Chinks in the no-discharge armor
Bankruptcy courts in most judicial circuits use the Brunner test to determine if repayment of a student loan debt after bankruptcy would cause an “undue hardship”.
To achieve a bankruptcy discharge of a student loan, the debtor has to the burden to show
“(1) the debtor[s] cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for [themselves and dependents] if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor[s have] made good faith efforts to repay the loans.”
The test has acquired levels of interpretation such that discharge requires a showing of efforts to pay and assured, hopeless, unchanging poverty in the future. That’s what you get, now, for trying to get an education.
Bankruptcy Judge Jim Pappas took up the gauntlet from Judge Easterbrook in challenging whether this hoary test from the 1980’s is properly reflective of bankruptcy law today in a persuasive concurrence in a 9th Circuit BAP case Roth. Said Judge Pappas
the analysis required by Pena/Brunner to determine the existence of an undue hardship is too narrow, no longer reflects reality, and should be revised by the Ninth Circuit when it has the opportunity to do so. Put simply, in this era, bankruptcy courts should be free to consider the totality of a debtor’s circumstances in deciding whether a discharge of student loan debt for undue hardship is warranted.
Student loan relief in Congress
H.R. 2366 has, undoubtedly, a tortuous path forward in Congress. But it is a clean, straight-forward approach to a complicated problem. Without a solution to student loan debt that threatens to crush both students and their parents, it is a vehicle to start the discussion.
Let your representatives in Congress hear from you on the impact of student loan debt on the life of your family, starting here.
