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Fixing the Broken Student Loan System

Prior to 1976, it was rather easy to cheat the system of student loan repayment by declaring bankruptcy shortly after earning a degree.  In response to the growing fear that as college attendance began to rise so too would student borrowers who would thwart the system, essentially earning their degrees for free.  The Bankruptcy Reform Act of 1978, Section 523(a)(8), essentially ceased such abuse of the system rendering student loan non-dischargeable.  In Legislative Attorney Kevin Lewis’ Congressional Research Service report “Bankruptcy and Student Loans” report, he reviews the 1976 justifications for making student loans “presumptively non-dischargeable in bankruptcy” (5). Congress made its case clear over time when amending Section 523(a)(8) that student loan forgiveness would not and could not be a part of bankruptcy declaration. The members of Congress cited America’s interest in “keeping our student loan programs intact,” as expressed by Representative Ertel.  If student loans are not repaid, then “taxpayers are the ones who must generally foot the bill” (Lewis 6). It was furthermore expressed that by “allowing debtors to easily discharge student loans…(it) would adversely impact the public fisc and thereby prevent future students from obtaining federal student loans of their own” (Lewis 6).  While in theory, Section 523(a)(8) aimed at ensuring future college students’ money for college loans, it also woefully harmed millions of graduates.  One supporter of 523(a)(8), representative Erlenborn, claimed that discharging student debt in bankruptcy was “tantamount to fraud” (124 Cong. Rec. 1793-1794 (1978). Additionally, several Members who supported the amendment emphasized that unlike other debts in bankruptcy court, creditors do not have the ability to repossess the items from the debt.  In Jean Braucher’s article “Mortgaging Human Capital:  Federally Funded Subprime Higher Education,” she vividly makes her argument that “a debt collector may repossess and resell a house if a homeowner fails to pay his mortgage, a creditor cannot remove a college education from a graduate’s brain, nor can an auctioneer sell a defaulting debtor’s degree on the open market”(69).  As result, Section 523(a)(8) separated college loan debt from other consumer debt thus rendering it dischargeable. 

Since 1978, Congress has intermittently amended Section 523(a)(8). The elimination of the temporal discharge option and the expansion of Section 523(a)(8) to private educational loans are two noteworthy amendments. Originally Section 523(a)(8) allowed debtors two options for discharging student loans: “the debtor could either (1) demonstrate an undue hardship or (2) prove that the loan first became due at least five years before the debtor filed for bankruptcy.  Thus, if a debtor’s loan was more than five years old, he could potentially discharge that loan in bankruptcy without proving an undue hardship” (Lewis 8).  This amendment went through two additional changes:  one in 1990 which extended the length from five to seven years, and two, in 1998, which changed the language of “temporal discharge” (by completely eliminating it) to one in which debtors need to demonstrate an undue hardship as the only way to discharge the student loan (Smith).  Furthering the difficulty of expunging student loans occurred in 2005 where student loans gartered from private sources were also added to the non-dischargeable list of debt in bankruptcy courts.  What followed these amendments was a maze of legal battles in bankruptcy court that have not defined “undue hardship” and have placed this burden on the federal judiciary.  Moreover, “the U.S. Supreme Court has not yet directly opined on the meaning of “undue hardship” (Lewis 10).  Without such clarity, the lower courts develop its own determining scale for “undue hardship” coined The Brunner Test.

The Brunner Test for determining “undue hardship” has been adopted by most courts and requires debtors to prove their financial struggles in three ways.  The Brunner Test requires the following:

1.  The debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for himself and his dependents if force to repay the loans;
2. Additional circumstances exist indicating that the debtor’s inability to pay is likely to persist for a significant portion of the repayment period of the student loans; and
3. The debtor has made good faith efforts to repay the loans. (Brunner v. N.Y. State of Higher Educ. Serv. Corp)

While the Brunner Test offers a path for dischargeabilty in bankruptcy court, it is not without fault.  The Brunner Test relies on facts and each court decides the outcome in their own way. 

The first requirement is the inability to maintain a minimal standard of living.  The debtor must prove the he or she “cannot maintain, based on current income or expenses, a ‘minimal’ standard of living for herself and her dependents if forced to repay the loans” (Brunner, 831 F.2d at 396).  The result of this is a highly intrusive and sometimes arbitrary investigation into one’s expenses.  While the courts are to be impartial, it is difficult to remove individual judgement from each scenario when determining ‘minimal’.  While “courts have typically held that the debtor need not “live in poverty in order to satisfy the first inquiry” of Brunner, they are held to both “objective and subjective measures” (Lewis 12).  Therefore, the debtor can be evaluated on such unnecessary purchases like a morning coffee, alcohol and cigarette purchases. Such divergent decisions can also be made regarding donations to one’s religious institutions.  One court stated, “when (a debtor) elects to tithe rather than pay his nondischargable debt,” he is “effectively making donations with someone else’s money” (Lozada, 594 B.R. at 224).

The second requirement is the future inability to repay, while the third is clear indication that the debtor has made a good faith effort to repay the debt.  The debtor must first pass the minimal standard of living category to get to step two.  At this level of the Brunner Test, the debtor must prove “the certainty of hopelessness” or “exceptional circumstances” (Lewis 17).  Some of the considerations for this step are “serious mental or physical disabilities; debtor’s obligation to care for children; poor quality of education; underemployment” (Lewis 17).  Again, to provide proof is a long, arduous and often costly step in the process.  The third requirement of the Brunner Test is to show good faith effort to repay loans.  Considerations in this category include some of the following: history of payments, length of time elapsed before seeking discharge, ratio of student loan debt to other debt, maximizing income by perusing full-time employment and the self-impose inability to pay (Lewis 25-27). While the Brunner offers a path of proving undue hardship, it remains costly, tedious and subjective. 

Currently, the Biden administration is attempting to alleviate the burden of student debt and make discharging student debt in bankruptcy court more tenable, especially regarding undue hardship.  On April 19, 2022 the U.S. Department of Education indicated that changes would be forthcoming.  In the announcement it plans to address “historical failures in the administration of the federal loan programs” (Nova).  According to reporter Annie Nova, “As many as 3.6 million people could be closer to debt forgiveness after these changes.  Around 40,000 borrowers may get immediate relief.”    U.S. Secretary of Education, Miguel Cardona, said, “Student loans were not meant to be a life sentence, but it’s certainly felt that way for borrowers locked out of debt relief they’re eligible for.” One of the measures that is a possibility is the bipartisan bill, Fresh Start Through Bankruptcy Act, championed in August 2021.  This bill would, “eliminate the undue hardship standard for federal student loan borrowers who have been in repayment…for at least 10 years” allowing “borrowers to eliminate their federal student loan debt as easily as any other type of dischargeable consumer debt” (Minsky). This bill would have the same ten year waiting period of other bankruptcy legislation to help prevent fraud (Minsky).

As the Biden administration charges forth on one its campaign promises and the Fresh Start Through Bankruptcy Act makes its way through committee, millions of Americans are still saddled with non-dischargeable student loan debt.  Improving and reforming legislation is never a black and white task, often requiring out-of-box thinking while keeping all stakeholders in mind.  Forgiving the debt of most distressed borrowers seems an obvious fix, yet such measures have not been taken.  If a borrower was defrauded by a predatory college, then his loan should be expunged.  While Presidents Obama and Trump have tried to rectify this matter, there remains a backlog of cases which impedes other cases from moving forward. Another measure that can be taken is income-driven repayment (IDR) plans.  Coupling a person’s debt to his income and possibly canceling debt after 25 years of repayment could decrease the number of people seeking loan forgiveness and some portions of the loan would be collected over the years ensuring certain monies for future borrowers. Yet another option would be to ensure that borrowers are spending more time paying down principle than interest.  Far too many college graduates get trapped in a system of accruing interest and penalties when failing to pay minimums. Finally, bankruptcy court holds an integral part of the reformation of student loans. 

People do not frivolously seek bankruptcy courts; in fact, many people try to avoid declaring bankruptcy all together, but therein lies the problem.  Bankruptcy policy and courts can help improve the lives of the millions drowning in student loan debt.  Acting as a protector of their clients, bankruptcy lawyers serve their clients.  Lawyers can help their clients discover pay-down-programs or and IDR that manages to help the individual get of debt without declaring bankruptcy.  However, if a client is truly at a level of a declaration, he should be able to exercise his democratic right to do so – he should not need to prove an undue hardship for discharging his student loans as his reasons for the loans in the first place was to better his education and earn a livable wage.

As bills and amendments continued to be proposed and the current administration puts forth its grand gesture in the form of meeting a campaign promise, the lives of millions of indebted Americans remain in the balance.  With a focus more on helping rather than penalizing those who seek to learn more, to earn more, America can move forward with a sensible, yet fair, policy regarding student debt.

Works Cited

Braucher, Jean. “Mortgaging Human Capital: Federally Funded Subprime Higher Education.” Washington

& Lee University School of Law Scholarly Commons, 2022, https://scholarlycommons.law.wlu.edu/wlulr/vol69/iss2/3/.

Dimino, Michelle. “Fixing Our Broken Student Loan System – Third Way.” – Third Way, 2022,

https://www.thirdway.org/memo/fixing-our-broken-student-loan-system.

Lewis, Kevin M. “Bankruptcy and Student Loans – Federation of American …” Bankruptcy and Student     

                Loans: FSA Project on Government, 18 July 2019, https://sgp.fas.org/crs/misc/R45113.pdf.

“Marie Brunner, Appellant, V. New York State Higher Education Services Corp., Appellee, 831 F.2d 395

(2d Cir. 1987).” Justia Law, 2022, https://law.justia.com/cases/federal/appellate-courts/F2/831/395/398433/.

Minsky, Adam S. “Big Changes to Student Loan Bankruptcy Rules May Be Coming – but Questions

Remain.” Forbes, Forbes Magazine, 21 Apr. 2022, https://www.forbes.com/sites/adamminsky/2021/10/28/big-changes-to-student-loan-bankruptcy-rules-may-be-coming—but-questions-remain/?sh=6778db9256eb.

Minsky, Adam S. “Will Discharging Student Loans in Bankruptcy Get Easier? Biden Administration Sends

Mixed Messages.” Forbes, Forbes Magazine, 14 Feb. 2022, https://www.forbes.com/sites/adamminsky/2022/02/11/will-discharging-student-loans-in-bankruptcy-get-easier-biden-administration-sends-mixed-messages/?sh=39fc1c602795.

Nova, Annie. “Education Department Changes Will Bring 3.6 Million People Closer to Loan Forgiveness.”

CNBC, CNBC, 19 Apr. 2022, https://www.cnbc.com/2022/04/19/millions-closer-to-student-loan-forgiveness-under-policy-changes.html.

“Proceedings of Congress and General Congressional Publications Volume 124, Part 29 (January 19, 1978

to October 14, 1978).” Volume 124, Part 29 (January 19, 1978 to October 14, 1978), Congressional Record (Bound Edition), 1978, https://www.govinfo.gov/app/details/GPO-CRECB-1978-pt29/GPO-CRECB-1978-pt29-1.

Smith, Kevin J.  The Income-Based Repayment Plans and For-Profit Education: How Does This

Combination Affect the Question to Include Student Loans in Bankruptcy?, 32 Ga. St. U. L. Rev. (2016).