Discharging Student Loans: I Tried to Tell Them

September 19, 2011

In the 1970s, Congress passed a law restricting discharge (i.e., forgiveness) of student loans when the student borrower has gone on to file bankruptcy.  Courts have generally opted for the harshest possible interpretation of that law.  That has led to extreme and sometimes absurd outcomes.

In 1998, I published a law review article presenting some things I had learned on the subject of student loan repayment.  Here are some excerpts from that article.  (As you will see upon examining the article itself, these statements are supported by extensive citations.  I have not included those citations here.)

  • It is clearly and emphatically the duty of the courts to construe the statute in the debtor’s favor.  Inexplicably, however, most courts have instead cited indefensible rationales (or no rationales at all) for shifting the burden of persuasion to the debtor in [student loan discharge] cases.
  • Problems [with the student loan program beloved by bankers, identified in a 1991 congressional investigation] included unscrupulous school practices; inadequate state licensing protection; failure of accreditation bodies to assure the quality of education required for program participation; exploitation by lenders, guarantors, and loan servicers; and gross mismanagement by the Department of Education. . . . [Student loan guaranty agencies] deliberately allowed loans to default, so that they could obtain full reimbursement from the government and then receive additional reimbursement from the debtors through post-default collections efforts.
  • One may fairly question the degree of and reasons for the alleged insolvency [of student loan funds] when student borrowers may have already paid billions in loan origination fees and may currently be paying the lender’s full cost of its own loan insurance.
  • A school with a high default rate on federal loans . . . ought to explain why the debtor’s unemployment or underemployment is consistent with nondischarge.
  • Construing irresponsibility as a trait that may lead to bankruptcy, fiscal or otherwise, one finds it ironic that [the court in the Brunner case absolved educational] institutions of all responsibility, placing it instead wholly upon the player with the least ability to improve matters. To the typical student borrower, it may seem that all the rules are made by others, and that an especially common bit of advice is to find some form of higher education if one wishes to succeed in this world. Under such circumstances, courts . . . are demanding a degree of wisdom and courage that not even the student’s parents or educators may have.
  • The courts have now spent nearly two decades telling loan-related institutions that they can learn nothing from the occasional student loan bankruptcy. . . . If education is indeed a business, as its less idealistic representatives sometimes declare, then it should accept the risk, common to most businesses, of having to pay for a few failures. Or, if market forces cannot bring improvements in our educational system, then the taxpayer should get the bill, to encourage public contemplation of an evident conflict between what schools can deliver and what the market will buy.
  • Some courts seem obsessed with enforcing the philosophy that government is not a safety net, to the point of ignoring steps that may serve the best interests of both the public and the individual.
  • According to Brunner, society should willingly accept a state of affairs in which each student may spend four or more years in college, living primarily on funds supplied by the government and others, and then graduate and move on to a job (or, more likely, a series of jobs) having little to do with the field of one’s degree. . . . One must wonder whether economic efficiency and personal happiness could have been better served by greater attention to the nexus of individual interests and market needs. Brunner‘s seeming belief that such mismatches are the unpreventable result of intellectual freedom would make more sense in a world untroubled by such practical factors as the conflict of interest that schools experience between competitively marketing themselves and being fully candid about their weak points; the urge to acquire students who improve the school’s diversity in race, gender, or some other regard, without asking whether the acquired student will be able to repay the resulting student loans; the professorial temptation to train students to become excited about unmarketable academic pursuits without providing concomitant warnings about real-world job prospects; and the phenomenon of schools flaunting prestigious names, certificate programs, and other devices by which to attract borrowed tuition dollars, all of which nevertheless prove insufficient to prevent bankruptcy in the individual case. It may take years for debtors to obtain a sense of what they might have gotten from an education in some other field or school, and in any event they cannot go back and do it over. By contrast, schools can and should be urged to improve themselves every semester, learning from the previous semester’s mistakes. After all, they are the ones claiming to have knowledge with which to educate others on the most important topics within the various disciplines. Schools’ expenses for helping their students understand and succeed in their careers will often be repaid in long-term support from grateful alumni and an appreciative public; and from a policy perspective, those expenses pale against the cost to society of carrying ill-fitted graduates in the workforce for decades thereafter.
  • The federal employees who draft pages upon pages of [educational] regulations must be amused by Brunner‘s assertion that the government has no interest in the quality or relevance of the education it is funding.
  • If the education and its financing so obviously fail to accomplish a meaningful end that, besides being unemployed in the field that s/he studied, the debtor becomes bankrupt, then the debtor’s ability to repay the loan is not obviously relevant . . . . In most such cases, the school probably bears some responsibility for such an outcome. Since the student’s entire life can be damaged by the result, it seems only reasonable to suggest that the resourceful debtor (who may eventually be able to find some other way of making a living) should be encouraged to direct the fruits of his/her labors to a productive future, not to the support of a past, unproductive educational institution or process.
  • [Regarding the legal process of seeking student loan discharge in bankruptcy], society does not benefit from a search for truth and efficiency that places [the burden of litigating the matter] on a party unable to do so effectively.  Student loan debtors must frequently proceed without the assistance of counsel, whose fees they frequently cannot afford — and which, if paid, could be used as evidence against a claim of inability to pay. . . . One might reasonably hesitate before requiring such a debtor to have the confidence that s/he alone can make a strong showing of undue hardship in a court of law that probably seems unfamiliar, unsympathetic, and perhaps even hostile, against a trained adversary backed by the litigation resources of a bank or governmental agency. The risks imposed by such a requirement must frequently seem prohibitive to the debtor who, although believing that s/he has a valid case, must consider the likelihood that s/he will incur substantial additional liability for his/her adversary’s litigation expenses, pursuant to the student loan agreement, if s/he loses.  One may find it surprising, under the actual circumstances of most cases, that a court could consider it just to place the burden upon the debtor.
  • It may seem obvious that a preponderance standard of proof, which produces “a roughly equal allocation of the risk of error between litigants,” would be incompatible with a requirement that either party must show that a given claim or fact is certain, or even highly likely.  Yet . . . [in] the case of NYSHESC v. Kohn, [Judge Roy Babitt] indicated that student loans could not be discharged unless, in trying to repay, the debtor “strips himself of all that makes life worth living.” . . . Judge Babitt developed this remarkable interpretation after repeatedly noting that he could find virtually no guidance on the proper construction of “undue hardship”; that “[c]ases in other areas of the law are of slight help”; that the Bankruptcy Commission Report was “difficult of application”; and that, of the two relevant congressional hearings he reviewed, one was “slightly more illuminating” than the other.  Clearly, the authorities failed to say what it seemed that they should say on the subject. Judge Babitt did pen the foregoing words; but he evidently disliked what he had wrought, and in the end he had unflattering words for the entire enterprise:

    While this court cannot shirk the responsibility cast on it by Congress to determine on a case by case basis whether one student borrower will be relieved and another not, the court finds the exercise demeaning in the last degree to itself and to the bankrupt. Of what insight is this or any court possessed to determine how an individual is to fashion his life style, or how much effort he should or can expend to repay his loan.

    . . . [Later], in what would become the leading Brunner case, Judge Haight of the Southern District of New York adopted this view, which he admitted was “draconian,” because he felt that “enlightened social policy” necessitated it. . . . Brunner requires the debtor to provide a “reliable guarantee of undue hardship” and to prove a “certainty of hopelessness.”

  • The National Bankruptcy Review Commission (“NBRC”) recommended to Congress, in 1997, that the student loan exception to discharge . . . be repealed entirely.
  • In words evoking Judge Babitt, [Judge Haight in Brunner adopted a dubious test of dischargeability despite his admission] that there was “no specific authority for this requirement” other than the presumed “need for some showing of this type” which, in turn, had to be “inferred” . . . . In applying his enlightened good faith test to the facts of the Brunner case, Judge Haight denied discharge to a debtor whose “counsel [had] apparently deserted her” and for whom no brief was filed.  Specifically, the court found bad faith in the timing of her bankruptcy filing, which occurred one month after the loans came due . . . . [But her] bankruptcy came seven months after graduation [which was in May 1982, during a severe recession with high rates of unemployment], and the facts indicate that, by then, she had been hunting for a job in her field for some time and had become thoroughly familiar with her prospects: her undergraduate degree was in psychology and her master’s degree was in social work; it had taken a decade of part- and full-time study to earn those degrees; during those ten years, she had never earned more than $9,000 annually; she had sent out over a hundred resumes without finding work in her field; and at the time of trial she had been receiving public assistance for four months.  Judge Haight acknowledged that, far from being a bankruptcy abuser about to commence a lucrative career, she was unlikely to find a job in her chosen field of work in the near future; the basis for his reversal was simply that there was insufficient evidence to prove that she was unable to find “any work at all,” even though she testified that she had “applied for any position that [she] could find.”
  • [Brunner] required the debtor to show that his/her difficulty was likely to persist . . . The meaning of this requirement became clearer when the Seventh Circuit adopted Brunner‘s reasoning in In re Roberson.  Mr. Roberson entered college on a part-time basis in 1980, and graduated in May 1986 with a degree in industrial technology.  He never obtained a job in that field, nor any financial benefit from his degree, because he earned more by staying at his prior job as an assembly-line worker.  He began making payments on his student loans . . . and continued doing so for approximately three years.  In 1989, his marriage and job situation deteriorated.  In January 1990, he received his second conviction for drunk driving; as a result, his driver’s license was revoked and could not be reinstated until sometime in 1993.  He was laid off in February 1990, and his divorce was finalized in April 1990.  His wages in 1990 were $2,846, and at the time of trial in 1991 they were zero, despite his best efforts to find employment.  He was jailed for three months in 1991, apparently because he was unable to make child support payments.  His ex-wife was awarded possession of their house, and at the time of trial, he lived in a $40-per-week rented room with no private bathroom or cooking facilities.  The bankruptcy court . . . [found] that, because he had no driver’s license and had carpal tunnel syndrome and back problems, his prospects for employment within the next few years were minimal. . . . [On appeal, the Seventh Circuit demonstrated] that the hopelessness requirement is such a clear, simple guide that it must overrule all other authorities, including logic. How else can one explain the Seventh Circuit’s conclusion that Mr. Roberson had not shown that he suffered from “the type of barrier that would lead us to believe he will lack the ability to repay for several years”?  His driver’s license suspension evidently ran for three years by itself, and it was not the only source of his hardship.  At the expiration of the judicial deferment in December 1993, nearly four years would have passed since he lost his job, and he would evidently be entering the eighth year of a ten-year loan repayment period.  Finally, the Seventh Circuit . . . [decided] that discharge must be denied if the default resulted from the debtor’s negligence or irresponsibility in conducting his/her financial affairs.  It would seem, then, that the Supreme Court must have meant to limit the fresh start to the honest but unfortunate — but fiscally prudent — bankrupt. By the lights of Roberson, bankruptcy, like so many other things in life, is most sought by those who are least qualified for it. . . . . [The court also cited] Perkins v. Vermont Student Assistance Corp. for the proposition that buying a new car was a self-imposed hardship.  The “new” car in Perkins was, in fact, a used Ford Pinto costing $3,325; and while one may share the court’s opinion to the extent that it addressed that particular model of automobile, the more general principle must be that a debtor who expects to continue earning an income over a repayment period extending for a number of years will probably need to spend a considerable amount on transportation, be it for a new car, a used car plus repairs, or bus fare.  Again, one senses diminishing returns from judicial micromanagement of debtors’ personal finances.
  • Is the purpose of Congress to preserve the student loan funds no matter what . . . ? Is institutional malfeasance necessarily peripheral to the student loan default crisis and to any resulting bankruptcies?  The majority of courts have taken a highly political and class-conscious position on such questions, defending institutions without regard to their unclean hands, frequently to the point of illogic. The student loan exception to discharge, as applied by many courts, indicates that the student debtor is comparable to the defrauder, the deadbeat dad, and the drunk driver.  [Explanation:  student loan discharge is limited by the same section of the Bankruptcy Code that limits discharges in these other circumstances.] . . . Students who might formerly have been treated as the promise of the future are now, implicitly, a threat to the nation. If, in such a climate, any student debtors have acquired an us-versus-them attitude lacking in civic responsibility, it seems certain that they face some similarly minded role models on the other side of the table. This is a shameful result for a program as well-intentioned and valuable as the student loan program. . . . It is poor policy to convey, to those future college students who are most eager to succeed and most worried about failing (and to their parents) this message:  your student loans could haunt you forever, no matter how bad your situation may become, how much the job market may change, or how poor your education may be.  Given the controversy in the 1970s surrounding the introduction of a student loan exception to discharge, that exception should not have become law in an unexplained backroom deal.

That law review article was long (87 pages; about 50,000 words) and well-supported (556 footnotes).  Yet it, and others like it, have made little impact.  Nearly 20 years after I first investigated the matter, the law and its interpretation remain largely unchanged.

Having offered those remarks, one reaction may be that 2011, with its concerns over the financial integrity of the national government, seems like an especially poor time to be talking about giving financial breaks to students or anyone else.  There are several responses to that.

First, the emphasis of this post is on history.  Looking back, it would have been helpful if the courts had been allowing students to provide an early warning of future problems in higher education.  A few bankruptcies at first, growing into a larger number later, could have sent warning signals back in the 1990s.  Unfortunately, the blame continued to fall upon the students, the banks continued to profit, the Department of Education continued to avoid scrutiny, and so now we have sailed happily on to a point where there is a great and growing disconnect between the cost of education and the employability of graduates.

I’m not necessarily sure that employability of college graduates should be the acid test of the value of college educations.  I am not making that argument here.  To the contrary, I am suggesting that the 1990s, not the 2010s, were the time when the public should have been confronted with these sorts of questions.  This historical emphasis does convey a message for the present, however.  Now, as in the 1990s, higher education is still very far from being reformed in relevant ways.  There is still a great deal of money to be saved or wasted, depending on future steps.

Second, it is always convenient to profess concern for the taxpayer in debates on governmental policy.  But if such concern were sincere and consistent, it would have been heard much more loudly throughout the inordinately expensive Bush years.  It’s not a question of Republican versus Democrat.  The problem here is, rather, that taxpayers, Democrat as well as Republican, were very quiet during all those years of war, reduced regulation, reduced taxation upon those who benefited most from the system, and other fiscally destructive policies.  Yes, someone is going to have to pay.  It’s odd to become particularly concerned about that when the subject is education, with its role in building the nation’s future.  Besides, which is cheaper — to tap the till for small amounts, growing into larger amounts, and leading to a warning to educators — or, instead, to just let the whole parade continue on its merry way over a cliff?  Disconnecting the fire alarm definitely can make life more peaceful in the short term; but good warnings save money in the long run.

Third, for several reasons — as I and others pointed out in numerous postings in the soc.college.financial-aid newsgroup back in the 1990s (now largely lost, in the wake of Google’s demolition of the old DejaNews) — it is not clear to what extent the taxpayer actually would have paid, does pay, or will pay for a more sensible policy toward student loan discharge.  It may yet turn out that the United States will default on its debts, in which case there will be no such payment.  It is very likely that the real value of what the U.S. offers foreign creditors in repayment of its debts will be reduced, as the U.S. dollar continues to become eroded against the currencies of foreign creditors.  In addition, assuming future taxpayers are somehow able to cover all of today’s debts, it is rather absurd to claim that the taxpayers being protected prominently include the very college graduates against whom these laws have been so harshly directed, for so long.  Doesn’t it seem a little odd that, except for the relatively recent federal direct lending program, the only people with a guaranteed safety net in this process have been the bankers?

For decades, the nation has needed a more sensible approach to the funding of higher education.  One possibility I floated back in the 1990s has been that of a free education in exchange for a lifetime pledge (of, say, 2% of the graduate’s income) to one’s alma mater.  Such a pledge, however enforced, would reward those institutions of higher education that efficiently produced eminently employable graduates.  The burden of deciding whether the institution should also produce relatively unemployable graduates in some fields would then fall upon the institution, not the relatively uninformed student and his/her parents.  The student would still be investing years, and plenty of hard work (unless the institution chose otherwise); but at least the institution would have some skin in the game — a tangible incentive, that is, to insure that students who look upon higher education as a ticket to a good-paying job are getting what they signed up for, and employers would have leverage in steering the quality of college educations.

Whether that possibility would be the best, I can’t say.  No doubt college students should be responsible for making prudent choices about how to develop their own futures.  But it does not make sense to base a large share of the nation’s higher education expenditures upon a process of simply giving them student loans, hoping they know what they’re doing, and burdening them for life if they don’t.

The real point here is not that I had all the answers, 15 or 20 years ago.  It’s that nobody was even interested in talking about it.  In those newsgroup discussions, in the courtroom, and elsewhere, these sorts of suggestions drew ridicule.  Quite aside from the question of compassion — and it is clear, from numerous court reports, that some student borrowers had been seriously yanked around and/or were experiencing severe hardship — there was not even a general public interest in thinking about what approach to higher education financing would make the most sense.  It was almost as if the voting public was too preoccupied with moralizing — against student borrowers facing difficulty, much like the self-defeating moralizing against people who could be truly or falsely accused of committing a crime — to focus on understanding the problem and finding practical solutions.


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