Kenneth Mars

Addressing the Essay Questions for the Fall 2024 Scholarship Essay Contest

Questions Addressed:

1. Out of the various historical rules and present efforts towards student loan forgiveness in bankruptcy, which rule(s), in your opinion, worked the best?
2. What elements of the historic approaches keyed in on the correct criteria for student loan forgiveness in bankruptcy?
3. Which past rule(s) best balanced the following considerations: fairness to struggling graduates burdened with large educational debt, practicality in terms of ability to administer and/or limit these benefits, and fairness to the country as a whole?

Introduction

Student loan debt in the United States has reached a critical tipping point, exceeding $1.7 trillion. The financial and psychological burden of millions of borrowers has sparked ongoing debates about how to address student loan forgiveness, particularly in bankruptcy cases. Over the years, various historic rules and present efforts have attempted to tackle the issue, each with its strengths and weaknesses. This essay evaluates these approaches, focusing on which have been most effective, which criteria have been most appropriate, and which have achieved a balance of fairness, practicality, and equity.

1. The Most Effective Rule(s) for Student Loan Forgiveness in Bankruptcy

Out of the various rules discussed, the “undue hardship” standard under the First and Eighth Circuits’ “Totality of the Circumstances Test” emerges as the most effective approach for determining student loan forgiveness in bankruptcy. Unlike the rigid “Brunner Test” used in the Second Circuit, the “Totality of the Circumstances Test” considers a broader range of factors, such as the debtor’s past, present, and future financial prospects, as well as the realistic possibility of repaying the loan.

This flexible approach considers the nuanced realities of borrowers’ lives, reducing the likelihood of unfairly denying relief to individuals facing genuine financial distress. For example, in cases where a borrower has incurred significant medical expenses or faces employment limitations due to disabilities, the “Totality of the Circumstances Test” allows these factors to weigh heavily in the decision.

In contrast, the “Brunner Test” imposes stringent criteria, including proving a “certainty of hopelessness” that often creates an insurmountable legal hurdle. Many borrowers who deserve relief cannot meet these rigid requirements, making the “Brunner Test” less compelling.

1. Correct Criteria for Student Loan Forgiveness in Bankruptcy

Several historical approaches have addressed the criteria for student loan forgiveness, each with varying degrees of success. The following elements from past rules effectively focus on appropriate criteria:

1. Treating Student Loan Debt Like Other Unsecured Debt

This approach, rooted in fairness, removes restrictions and allows borrowers to discharge student loans in bankruptcy. It acknowledges that borrowers should not be penalized for pursuing higher education more than individuals who accumulate credit card debt or personal loans. Treating student loan debt like other unsecured debt would remove the stigma and exceptional barriers associated with such loans, allowing bankruptcy laws to function as a valid financial reset.

1. The 5- or 8-Year Discharge Rules

The historic rule allowing borrowers to discharge student loans in bankruptcy if they cannot repay them within 5 or 8 years post-graduation effectively addressed the timeline of repayment struggles. These rules acknowledged that many borrowers might face early-career financial instability and provided a transparent, time-bound path to relief. However, their rigidity limited their applicability in cases where financial distress persisted beyond the designated period.

1. The “Undue Hardship” Standard

The “undue hardship” standard remains a cornerstone of bankruptcy law. As previously discussed, the “Totality of the Circumstances Test” version of this standard is preferable, as it allows for individualized assessments. The emphasis on hardship aligns with the moral imperative to protect borrowers who cannot afford repayment.

1. Executive Action on Loan Forgiveness

While executive action to forgive a portion of student loan debt for all borrowers—as proposed by the Biden administration—is not tied to bankruptcy, it represents a bold attempt to address the debt crisis at scale. However, the lack of differentiation between borrowers in varying financial circumstances undermines its fairness and effectiveness.

1. Balancing Fairness, Practicality, and Equity

The best past rules for balancing fairness to borrowers, administrative practicality, and fairness to the country as a whole include the following:

1. The 5- or 8-Year Discharge Rules

These rules struck a reasonable balance between fairness and practicality. Setting clear timelines simplified the administrative process and reduced legal disputes over whether borrowers met eligibility criteria. At the same time, they provided meaningful relief to borrowers who could not repay their loans within a reasonable time frame.

1. The “Totality of the Circumstances Test”

This test balances fairness by considering the unique circumstances of struggling borrowers, ensuring they receive appropriate relief while preventing undue forgiveness for those with the capacity to repay their loans. Although it demands more judicial discretion than rigid standards, its ability to deliver equitable, tailored outcomes on a case-by-case basis makes it a superior approach.

1. The Role of Administrative Agencies

The present system offers a hybrid approach, wherein agencies like the U.S. Department of Justice and the U.S. Department of Education recommend eligibility for loan discharge in bankruptcy. It combines judicial discretion with administrative expertise to thoroughly evaluate borrowers’ cases. However, critics argue that this system complicates processes and creates the potential for inconsistent application.

1. Treating Student Loan Debt as Unsecured Debt

From an equity standpoint, treating student loan debt like any other unsecured debt is the fairest approach for the country. It places education debt on equal footing with other types of consumer debt, thereby avoiding the implicit punishment of borrowers who pursue higher education. Critics may argue this could incentivize irresponsible borrowing, but stronger front-end regulation of student lending practices can mitigate this concern.

Conclusion

The “Totality of the Circumstances Test” is the most effective rule for addressing student loan forgiveness in bankruptcy due to its flexibility and individualized approach. Elements such as treating student loans like other unsecured debt and the time-bound 5- or 8-year discharge rules also offer valuable insights into creating a fairer system. Balancing fairness to borrowers, administrative practicality, and equity in the country requires a multifaceted approach that draws on the strengths of past rules while avoiding their pitfalls.

As the nation grapples with the growing student debt crisis, future policies should strive to uphold these principles, ensuring that higher education remains an opportunity rather than a lifelong financial burden.

References

1. U.S. Department of Education. (2023). “Federal Student Loan Portfolio.” Retrieved from https://studentaid.gov/data-center.
2. National Consumer Law Center. (2022). “Student Loan Bankruptcy: Analysis of Court Decisions.” Retrieved from https://www.nclc.org.
3. Supreme Court of the United States. (2023). “Loper Bright Enterprises v. Raimondo.” Retrieved from https://www.supremecourt.gov.
4. Congressional Research Service. (2023). “The Biden Administration’s Student Loan Forgiveness Plan: Legal and Economic Implications.” Retrieved from https://crsreports.congress.gov.