Softening the Standard for Discharge of Student Loan Debt

According to data compiled by the Federal Reserve, national student loan debt in the United States rose an astounding 275% from 2003 ($241 billion) to 2012 ($904 billion).  This surge in student loan debt was no doubt spurred by the economic downturn, as people who lost jobs or could not find jobs right out of college opted for more post-secondary (college and graduate-level) schooling.  It is not as if Americans just let themselves go financially during the recession.  From 2008 to 2012, student loan debt rose $293 billion, while other debts decreased by a combined $1.53 trillion.  As of mid-2014, nationwide student loan debt has jumped to an all-time high $1.2 trillion.  That represents an 84% increase since the recession alone.  Even more sobering is that, as of September 2014, well over 40 million Americans have at least one outstanding student loan, up from 29 million in 2008, and the average student loan balance is roughly $29,000.

Things will only continue to get worse for the student loan problem in the United States because college enrollment is on the upswing and the total cost of a college education will only grow over time, even if it has slowed of late.  Worst of all, the rampant growth of student loan debt will go unchecked so long as student lenders have no incentive to curtail the amount of student loans given out to individual borrowers.  This means colleges have no incentive to keep tuition and other costs at a minimum since students can find a funding source no matter how high tuition costs soar.  It is this vicious cycle that has given rise to the student loan “crisis” in America.  While lawmakers routinely talk about addressing the problem, there is no meaningful change in sight.

Our current system of worry-free student lending (worry-free from the lender’s perspective) is a byproduct of changes to the bankruptcy code over a period of several decades with regard to a bankruptcy debtor’s ability to discharge a student loan debt.  Before 1976, student loans were fully dischargeable—meaning they could be wiped away completely—in bankruptcy just like any other debt.  However, in the early 1970s, Congress became concerned that bankruptcy was being utilized by recent college graduates as an improper vehicle for wiping away student loans, without any true effort to repay them, right before beginning well-paying careers.  So, with the passage of the Education Amendments Act of 1976, Congress made all student loans made by the government or nonprofit college or university nondischargeable during the first five years of repayment absent a finding of “undue hardship on the debtor or his dependents.”  With the passage of the Bankruptcy Act of 1978, this exception to discharge for student loans in bankruptcy was codified at 11 U.S.C. § 523(a)(8).

A slight change to § 523(a)(8) in 1984 opened the door to excepting private student loans from discharge, and in 1990, the nondischargeability period of § 523(a)(8) was expanding from five to seven years by amendment.  In 1998, a major sea change occurred when § 523(a)(8) was amended to remove the language allowing education loans made or insured by a governmental unit to be discharged after seven years, meaning that education loans made or insured by a governmental unit were altogether dischargeable absent a showing of “undue hardship.”  Finally, with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, most private student loans were brought under the § 523(a)(8) exception to discharge.  This left us where we are today:  rising tuition costs and lenders with little incentive to limit the amount of student loans made to individual students or assess any particular student’s ability to repay such loans.

While Congress legislatively chipped away at the dischargeability of student loans throughout the 1990s and early 2000s, it has actually been the courts that have made discharging student loans so difficult.  While the phrase “undue burden” may have seemed innocuous enough in 1976, the phrase took on a whole new meaning after the United States District Court for the Southern District of New York’s decision in In re Brunner, 46 B.R. 752 (Bankr. S.D.N.Y. 1985), aff’d sub nom, Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987).  The Brunner court held that a debtor attempting to shot “undue hardship” must meet three requirements:

1) that the debtor cannot, based on current income and expenses, maintain a “minimal” standard of living for himself or herself and his or her dependents if forced to repay the loans,

2) that this state of affairs is likely to persist for a significant portion of the repayment period of the student loan, and

3) that the debtor has made good faith efforts to repay the loans.

Id. at 756.  This Sixth Circuit has adopted the Brunner test.  In re Barrett, 487 F.3d 353, 358 (6th Cir. 2007).  The United States Bankruptcy Court for the Eastern District of Lexington has held that to meet the second requirement—which has turned out to be the most problematic for student loan debtors—“a debtor must show circumstances that indicate a certainty of hopelessness, not merely a present inability to fulfill financial commitment.”  In re Gibson, Adv. No. 09-5104, 2010 WL 396567, at *1 (Bankr. E.D. Ky. Jan. 27, 2010).

It should be borne in mind, however, that Brunner was decided in 1985—at a time when § 523(a)(8) only prevented debtors from obtaining a discharge during the first five years of repayment of a student loan absent a showing of “undue hardship.”  In other words, back in 1985, a student loan debt was dischargeable in bankruptcy without any showing whatsoever so long as five years had passed since the commencement of the repayment period on the debtor’s student loan.  It is understandable, then, that courts would require a stringent showing of “undue hardship” in order for a debtor to be relieved from a student loan debt less than five years after the debtor had to commence repayment.  One is left to wonder whether the Brunner court’s decision would have been the same if, at the time, § 523(a)(8) prevented a student loan debtor from ever discharging his or her student loan debtor absent a showing of “undue hardship,” as it does now.  Indeed, there are a growing number of courts that view the Brunner test as outmoded.

The first major circuit-level rejection of the Brunner test came in In re Long, 322 F.3d 549 (8th Cir. 2003), where the Eighth Circuit rejected the Brunner test as “diminish[ing] the inherent discretion contained in § 523(a)(8)(B), instead opting for “a less restrictive approach to the ‘undue hardship’ inquiry.”  Id. at 554.  The Long court adhered to the Eighth Circuit’s pre-Brunner “totality-of-the-circumstances” approach.  At least one other appellate-level court has dissented against Brunner.  See In re Brondson, 435 B.R. 791, 800 (B.A.P. 1st Cir. 2010) (rejecting Brunner test in favor of totality-of-the-circumstances test).  And even while choosing to follow Brunner, the Tenth Circuit still commented that many courts employ “an overly restrictive interpretation” of the Brunner test.  Educational Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302, 1308 (10th Cir. 2004).

The growing uneasiness about the Brunner test was summed up best by Judge Pappas’ concurrence in In re Roth, 490 B.R. 908 (B.A.P. 9th Cir. 2013).  Acknowledging that Ninth Circuit lower courts were “restricted by precedent,” Judge Pappas nevertheless took the opportunity to express his view that the Brunner test “is too narrow” and “no longer reflects reality.”  Id. at 920 (Pappas, J., concurring).  Referring to the Brunner test as “a relic of times long gone,” Judge Pappas noted that vast differences between § 523(a)(8) as it stood at the time of Brunner and the current version of § 523(a)(8), and the resulting affect on, or boon to, the student loan industry:

But things are different now [than when student loans could be discharged after five or seven years]. Unlike the loans made mostly to traditional students by local banks and colleges in the 1970s, today, a variety of lenders now compete to provide “financial assistance” for a broad assortment of study and training, without regard to the wisdom of a student’s decision to borrow or their particular circumstances, and with nary a thought given to the borrower’s ability to repay the debts.

Id. at 922 (Pappas, J., concurring).  While Judge Pappas’ may be in the minority now, it may not stay that way for long, particularly if student loan debt mushrooms into the next financial “crisis” that many predict.

As it presently stands, most debtors in most bankruptcy courts face an uphill battle to discharge their student loan debt.  But the law is not static.  There are arguments to be made—as several courts have already concluded—that the Brunner test is old-fashioned and outdated.  The current state of educational lending and the ever-increasing cost of tuition requires that courts revisit a test for discharging student loan debt that was created nearly thirty years ago, under a version of the student loan discharge exception that bears little, if any, resemblance to the current § 523(a)(8).


One Reply to “Softening the Standard for Discharge of Student Loan Debt”

  1. The three requirements that held by the Brunner court is highly appreciate. I agree with you that most debtors in most bankruptcy courts face an uphill battle to discharge their student loan debt. But the law is not static. The law should be stable to handle this problem.

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