Student Loans Should Be Dischargeable Some Day

A recent case out of the 7th Circuit illustrates the practical impossibility of discharging federal student loan debt.  The statute says that this debt can be wiped out in bankruptcy in cases of "undue hardship" but the court gloss on that legal standard is far more severe.

In this case, a 56 year old who ran up $260,000 of debt to earn an MBA and JD at marginal schools who then failed the bar exam twice, and is now unemployed, with a criminal record and lives with his elderly mother, sought to discharge his student loans. the Court acknowledges that "(1) [he] cannot maintain, based on current income and expenses, a “minimal” standard of living for himself and his dependents if forced to repay [his] loans[.]"

This wasn't enough.  To discharge the loans, it must also be true that: "(2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and (3) [he] made good faith efforts to repay the loans."

To satisfy the second prog who must demonstrate "the certainty of hopelessness."

The second prong of the Brunner test contemplates whether “additional circumstances exist indicating that [the inability to pay] is likely to persist for a significant portion of the repayment period … .” Roberson, 999 F.2d at 1135. We have noted that “the dischargeability of student loans should be based upon the certainty of hopelessness, not simply a present inability to fulfill financial commitment.” Id. at 1136 (citing In re Briscoe, 16 B.R. 128, 131 (Bankr. S.D.N.Y. 1981)). While in Krieger we noted that the “certainty of hopelessness” standard “sounds more restrictive than the statutory ‘undue hardship’ [standard]” we also noted that “a judge asked to apply a multi-factor standard interpreting an open-ended statute necessarily has latitude; the more vague the standard, the harder it is to find error in its application.” 713 F.3d at 885. 

In this case, the debtor had two expert witnesses lined up to show "the certainty of hopelessness", but was barred from using them at trial because he below his expert witness disclosure deadline.  The lender didn't show or even attempt to show how it was prejudiced by this late disclosure.

To satisfy the third prong, which can bar discharge of student loans even when the debtor cannot maintain a minimal standard of living and faces "the certainty of hopelessness" that the loan will ever be repaid, it is not sufficient to show that the debtor "made good faith efforts to repay the loans" by paying as much as he could on another loan incurred for his law school education at the same institution.

Instead, because he hadn't made many payments on this particular arbitrarily designated part of his student loan, he was barred as a matter of law from establishing that he made a good faith effort to repay the loans.

This judicial gloss on the undue hardship standard set forth by the statute goes far beyond the express statutory requirements for discharge of a student loan and makes it all put impossible to secure a discharge.

The law is the law.  But, Congress has the power to change it, and it does.  The economic reality is that higher education can impart substantial economic value to the student who can't part with that benefit and return it, even if the students wants to do so.

But, it is also the case that dubious institutions of higher education, including law schools, that grant degrees to people with no realistic chance of passing the bar exam, have conferred almost no value to the student at immense cost to that student, and the student isn't necessary in a great position to evaluate that risk which mediocre schools do not disclose or disclose only in a misleading manner.

By all means, people who get degrees and use those degrees to secure gainful livelihoods should pay for their loans.  But, someday, somehow, someone whose only mistake was to try to get a degree in a career that they later proved unable to pursue, ought to a get a break at some point.  Congress intended that when it created the undue hardship exception, but with now binding case law, that exception has essentially disappeared.

There is simply no way that failure to pay a debt that you are unable to maintain a minimal standard of living if you pay should count against you in a discharged proceeding.  Nor should a standard so daunting as "certainty of hopelessness" ever enter the legal lexicon.  A more appropriate standard would be that by a preponderance of the evidence it is unlikely that you will be able to pay a significant part of the loan in the foreseeable future, with the burden on the lender to show otherwise.

Quite frankly, neither of those prongs are really necessary.  The first prong, standing alone, adequate captures the statutory meaning of "undue hardship" and the other two should be abandoned by Congressional action.  The bar on the discharge of student loan debt should also expire at some point, perhaps 15 years if one earns a degree and any necessary professional credential to utilize it, and 5 years if one fails to earn the degree or is unable with reasonable diligence to attain the necessary professional credential to utilize it.

We would never punish a bad investment in physical or economic capital so harshly.  Education, which is the primary investment of most members of the middle class, shouldn't receive this kind of harsh treatment either.