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How a Bipartisan Bill Could Improve the Rigorous Standard for Discharging Student Loans

Published onNov 15, 2022
How a Bipartisan Bill Could Improve the Rigorous Standard for Discharging Student Loans

Currently, Americans have $1.7 trillion in total student loan debt. This substantial figure is attributed to tuition at American universities increasing at a greater rate than incomes. During the 1991-92 school year, the average tuition at public and private institutions was $4,160 and $19,360, respectively. These figures skyrocketed to an average tuition of $10,740 at public institutions and $38,070 at private institutions for the 2021-22 school year. Due to these increasing costs, many students and their families resort to student loans to help pay for college. 

Although it is technically possible to discharge student loans in bankruptcy, the process is both complex and expensive. Section 523(a)(8) of the U.S. Bankruptcy Code states that student loans are not dischargeable "unless excepting such debt from discharge . . . would impose an undue hardship on the debtor and the debtor's dependents." Practically speaking, student loan borrowers must file lawsuits against their student loan creditors to make a showing of undue hardship in court. Usually, student loan lenders have adequate resources to defend against suits of this nature, while borrowers are more severely impacted by litigation costs.

The Brunner test, which was established by the Second Circuit, is used to determine if a debtor has satisfied the undue hardship requirement. To satisfy the Brunner test, a debtor must show: "(1) that she cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her 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 she has made good faith efforts to repay the loans." This stringent standard makes it exceedingly difficult to discharge student loans.

Unlike most loans, student loans are primarily entered into by young people who recently graduated from high school. There is no minimum age requirement to apply for federal student loans, and borrowers of private student loans only need to be 18 years or older in most states. Because student loans are usually incurred by young people, student loan borrowers often begin their careers with crippling debt and poor credit scores. A poor credit score can negatively impact an individual's chances of obtaining future loans such as car loans and mortgages and can impact an individual's ability to rent property. Due to the difficulty of discharging student loans under the current landscape, student loan borrowers are denied the "fresh start" that the bankruptcy process seeks to promote. As a result, borrowers enter the workforce facing a plethora of financial issues that they cannot escape. 

The undue hardship standard for discharging student loan debt has faced social and political scrutiny. As a result, Senators Richard Durbin (D-IL) and John Coryn (R-TX) enacted a bipartisan bill called the "Fresh START Through Bankruptcy Act of 2021" (the Act), which would render federal student loans dischargeable after ten years from the date they first came due. However, the undue hardship standard from Section 523(a)(8) of the U.S. Bankruptcy Code would remain intact for private student loans. The Act intends to positively impact all American taxpayers, not only student loan borrowers. In instances of default on federal student loans, the federal government does not receive repayment and interest, which negatively impacts taxpayers. However, if enacted, the Act would necessitate institutions that receive a specified number of federal student loans to partially repay discharged federal student loans to the taxpayer. 

One of the main reasons that student loans are exempt from discharge is Congress's concern that borrowers would enter into student loans with the intention of discharging them shortly after graduation. However, the Act's ten-year waiting period remedies this concern. By implementing a ten-year waiting period, the Act assures Congress that borrowers will not abuse the bankruptcy process. In enacting federal bankruptcy laws, Congress sought to provide debtors a "clean slate" from their pressing debts. Since student loan debt is the second largest source of debt in U.S households, many student loan borrowers desperately seek a fresh financial start. Although the Act necessitates a lengthy ten-year waiting period, it would eventually allow student loan borrowers to discharge their debt, which is a key improvement to the current standard for discharging student loan debt. The Act, if enacted, would remedy Congress's concerns about abuse of the bankruptcy process, while providing student loan borrowers with relief. Thus, the Act demonstrates a fair compromise between borrowers and Congress and will help alleviate the devastating amount of student loan debt in America. 

Roger Sharp is a second-year law student at Wake Forest University School of Law. He received his undergraduate degree from the University of South Carolina, where he majored in Statistics.

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