Student loan debt exceeds $1.6 trillion.
Just today I met with a man whose wife had signed on a PLUS (Parent’s Loan for Undergraduate Students) Loan and wanted to discuss a possible bankruptcy for her to discharge this massive debt. They’re both retired and though they’ve been paying for years, she still owes over $180,000. I had to tell him that it would be almost impossible to discharge this loan in bankruptcy.
Student loans occupy a royal seat in the bankruptcy world. They, along with taxes, are among the few debts that generally cannot be discharged by bankruptcy. Unlike some of the non-dischargeable debts such as those fraudulently incurred, those caused by driving under the influence of drugs or alcohol or those resulting from intentionally damaging another’s property, student loans enjoy a presumption of non-dischargeability. While it is theoretically possible to get out of student loans, it’s a high bar to meet and it requires filing an adversary proceeding, which is a lawsuit within the bankruptcy, and having a trial. The burden is on the debtor to show that requiring repayment of student loans would cause an undue hardship on the debtor.
Undue hardship is a term of art in the bankruptcy realm. It doesn’t just mean that it would be difficult to repay, or that it would impose a hardship on the debtor, meaning he and his family might have to forego some of the things that other families do, like vacations. Undue hardship means an extreme hardship. As it is usually stated, it means that it all but impossible for the debtor to find work. Not just work in the debtor’s chosen field, i.e. the training that the debtor got with the student loan but work in general. If the debtor went to medical school on student loans and has $500,000 in debt but for some reason can’t work as a doctor, as long as the debtor can work at something, she cannot discharge the student loans.
Now, to be fair, loan repayments are income based, so that if the unfortunate debtor can’t work as a doctor, earning $250,000/year, but has to accept work as, say, a high school biology teacher earning $40,000/year, her loan payments are based on $40,000/year, not the $250,000 she went to school expecting to earn. But the debt is still there. Any time she applies for a loan that half million dollar debt will show up. A lending officer looking at a credit application from a high school teacher making $40,000 per year and owing over 12 times that amount is not likely to approve the credit application. She’s looking at a future of renting and driving 10-year old cars.
Over the years, courts have followed what is called the Brunner test to determine whether an undue hardship exists. This test involves three parts, or prongs as they are called.
The first test is, is the debtor unable to maintain a minimal standard of living on her current income? A “minimal” standard of living is truly that.
The second prong could be called the persistence prong. Is it likely the poverty level subsistence will continue for the foreseeable future?
The third prong is whether the debtor made a good faith effort to repay the student loans.
The student loan industry is a mess. It needs to be changed, but it’s not sexy enough to attract high profile protesters. There aren’t dozens of people coming forward and saying, “this happened to me, too.” It’s just millions of people living day to day, barely getting by, with no light at the end of the tunnel, all because they thought that by going back to school or continuing their educations they could get ahead.