Almost $1.8 trillion in student loans is owed in the United States, and this enormous debt appears to be growing.[1] As the Biden administration fights new legal challenges regarding its plan to provide student borrowers with up to $20,000 in instant debt relief,[2] it is worth analyzing how difficult it is for thousands of American borrowers who struggle to pay off their student loans. This post examines both the current uphill battle borrowers face when trying to discharge their student loans through bankruptcy and the recent efforts to make student loan discharge easier.
Obtaining student loan relief through bankruptcy is very difficult, but not impossible. Bankruptcy experts suspect this misconception of impossibility is part of the reason why only about 400 students make discharge requests out of the nearly 250,000 student loan borrowers who file for bankruptcy yearly.[3] Statutorily, the bankruptcy code only allows discharge for student loans if the loans “would impose an undue hardship on the debtor and the debtor’s dependents.”[4] A borrower must prove undue hardship in an adversary proceeding as established in Brunner v. New York State Higher Education.[5] The Brunner court set up a three-part test, requiring the debtor to show “(1) [they]cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for [themselves and their]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 has made good faith efforts to repay the loans.”[6] While the Brunner test has historically proven to be a heavy burden for borrowers, some courts have shown a willingness to move away from its rigid requirements.[7] Further, the Eighth Circuit replaced the Brunner analysis with a “totality-of-the-circumstances approach to the ‘undue hardship’ inquiry.”[8] Last year, the Supreme Court refused to clarify the circuit split on the undue hardship standard by denying cert to hear a Fifth Circuit case.[9] As a result, struggling borrowers are left with a somewhat undefined, “harsh” standard to prove they are unable to pay off their student debts.[10] Complicating matters is the paradox that debtors would likely be required to pay more in legal fees to challenge Brunner’s strict undue hardship standard. Considering that debtors do not wish to prolong their bankruptcy proceedings and absent pro bono legal support, changing the undue hardship standard would be an arduous task for a debtor.
Currently, it appears that student loan relief reforms are more likely to come from Congress or the executive branch than from the judiciary. The Biden administration has signaled that student loan debt forgiveness is a priority, and The Department of Education (the “DOE”) has taken the initial steps of making rules to make debt forgiveness easier for students who were defrauded by their schools, are disabled, or have a career in public service.[11] There are also signs the DOE is backing off aggressively pursuing those who fail to make loan payments.[12] Earlier this year, the agency dropped its appeal of a case concerning a borrower who was able to discharge their loans by proving undue hardship from long-term medical issues.[13] The DOE initially filed for an appeal to uphold Brunner’s strict standard but ultimately decided to reverse its decision after it received intense public backlash.[14] Secretary of Education Miguel Cardona has addressed how difficult it is for students to get loan relief, claiming, “We are committed to fixing a broken system.”[15] How far the Biden administration is willing and able to go to reform student loan relief remains to be seen.
Congressional efforts to reform student loan relief also paint a somewhat murky picture. Last year, a bipartisan group of lawmakers introduced a bill that would have removed the undue hardship standard for federal student loans if the borrower successfully repaid their loans during the prior 10 years.[16] The bill’s effectiveness would have been somewhat limited, given the 10-year payment requirement. However, the bill failed to garner the required support to reach a vote in the Senate.[17] In September, Congressional democrat leaders introduced a more aggressive bankruptcy reform bill that would eliminate the undue hardship standard and create a new provision in the bankruptcy code which would treat student loans like all other forms of debt in bankruptcy proceedings.[18] No vote has been called on the newer bill yet, and considering Congress is now divided with republicans taking control of the House of Representatives in 2023, it appears the bill is unlikely to pass.[19]
Overall, student loan relief reform efforts are progressing at a sluggish pace. The situation involves an executive branch that acknowledges the system is broken,[20] Congressional representatives who want to make changes but have not yet made a foothold on any legislation,[21] and a court system that is left with a rigorous bankruptcy standard that the Supreme Court does not want to review.[22] Without a clear solution, some experts predict nearly 40 percent of borrowers may default on their student loans by the end of this year.[23] And as higher education costs rise, students are taking out more loans.[24] As the mountain of debt continues to grow, many more borrowers who cannot pay their debts will be forced to face the uphill legal fight in proving their loans pose an undue hardship.
[1] See Student Loans Owned and Securitized, St. Louis Fed. Rsrv., https://fred.stlouisfed.org/series/SLOAS (last updated Dec. 7, 2022).
[2] See Nate Raymond, U.S. Judge Strikes Down Biden’s Student Debt Relief Plan, Reuters (Nov. 10, 2022), https://www.reuters.com/legal/us-judge-declares-bidens-student-debt-relief-plan-unconstitutional-2022-11-11/.
[3] See Aisha Al-Muslim, Upending Bankruptcy ‘Myths,’ Judge Erases $220,000 Student Loan Debt, Wall St. J. (Jan. 8, 2020), https://www.wsj.com/articles/upending-bankruptcy-myths-judge-erases-220-000-student-loan-debt-11578523767.
[4] 11 U.S.C.A. § 523 (Westlaw) (emphasis added).
[5] See generally Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987).
[6] See id. at 396.
[7] See Al-Muslim, supra note 3.
[8] See In re Long, 322 F.3d 549, 554 (8th Cir. 2003).
[9] See Adam S. Minsky, Supreme Court Rejects Student Loan Bankruptcy Case, Leaving Harsh Standard Intact for Now, Forbes (June 28, 2021), https://www.forbes.com/sites/adamminsky/2021/06/28/supreme-court-rejects-student-loan-bankruptcy-case-leaving-harsh-standard-intact-for-now/?sh=1fb128273021.
[10] Id.
[11] See Collin Binkley, Biden Admin Relaxes Rules for Student Debt Forgiveness, Assoc. Press (Oct. 31, 2022), https://apnews.com/article/biden-education-government-and-politics-79e3c6743ca443945666edee6b9bd982.
[12] See Adam S. Minsky, Will Discharging Student Loans in Bankruptcy Get Easier? Biden Administration Sends Mixed Messages, Forbes (Feb. 11, 2022), https://www.forbes.com/sites/adamminsky/2022/02/11/will-discharging-student-loans-in-bankruptcy-get-easier-biden-administration-sends-mixed-messages/?sh=2fdc90a42795.
[13] Id.
[14] Id.
[15] See Getting Student Debt Forgiveness Could Be Easier Under New Rules Proposed by Biden Administration, CBS News (July 6, 2022), https://www.cbsnews.com/news/student-debt-forgiveness-new-rules-proposed-biden-administration/.
[16] See FRESH START Through Bankruptcy Act, S. 2598, 117th Cong. § 2 (2021).
[17] Id.
[18] See Consumer Bankruptcy Reform Act of 2022, S. 4980, 117th Cong. (2022).
[19] Id.
[20] See CBS News, supra note 15.
[21] See Consumer Bankruptcy Reform Act of 2022, supra note 18.
[22] See Minsky, supra note 8.
[23] See Judith Scott-Clayton, The Looming Student Loan Default Crisis is Worse Than We Thought, Brookings (Jan. 11, 2018), https://www.brookings.edu/research/the-looming-student-loan-default-crisis-is-worse-than-we-thought/.
[24] See Emma Kerr & Sarah Wood, See How Average Student Loan Debt Has Changed, US News & World Rep. (Sept. 13, 2022), https://www.usnews.com/education/best-colleges/paying-for-college/articles/see-how-student-loan-borrowing-has-changed#:~:text=The%20average%20student%20loan%20debt,according%20to%20U.S%20News%20data.&text=%7C-,Sept.,2022%2C%20at%208%3A00%20a.m.&text=Average%20student%20loan%20debt%20has%20been%20on%20the%20rise%20as,up%20with%20soaring%20college%20costs.
