Dischargeability of Student Loans in Bankruptcy

This is a paper that I wrote for the Commercial Law League Spring Meeting on April 25, 2014.   The Commercial Law League, which is a national creditors’ rights organization, is debating whether to support greater dischargeability of student loans.

Dischargeability of Student Loans in Bankruptcy

Stephen W. Sather

Barron & Newburger, P.C.

Austin, TX

            Student loans play a major role in American society.   As of 2013, there was over $1 trillion in outstanding student loans. See Chopra, Student Loan Debt Swells, Federal Loans Now Top a Trillion, Consumer Financial Protection Bureau, (July 17, 2013) accessed at http://www.consumerfinance.gov/newsroom/student-debt-swells-federal-loans-now-top-a-trillion  This  number is higher than the amount owed on either credit cards or auto loans and is second only to the amount owed on mortgage loans.   See Denhart, How the $1.2 Trillion College Debt Crisis Is Crippling Students, Parents and the Economy, Forbes (August 7, 2013), accessed at http://www.forbes.com/sites/specialfeatures/2013/08/07/how-the-college-debt-is-crippling-students-parents-and-the-economy/.     Over thirty-seven (37) million Americans representing approximately  20% of American households owe student loans.     Of outstanding student loan debt, $864 billion consists of federal student loans and $150 billion consists of private student loans.    See Hauser, Student Loan Debt in Bankruptcy, State Bar of Texas Advanced Consumer Bankruptcy Course (February 20-21, 2014).

            The education provided by a student loan may provide an entry into the middle class However, the debt incurred in obtaining this education is something that will likely remain with the student through every socio-economic class in which he travels.  

Prior to 1976, student loans were dischargeable the same as any other unsecured debts.    From 1976 to 2005, the dischargeability of student loans was restricted to the point where substantially all student loans are now excluded from discharge absent a finding of undue hardship.

•          1976:   Government-backed student loans are non-dischargeable for five years unless undue hardship proven.
•          1984:   Private loans funded or guaranteed by a governmental unit or non-profit are added to the list of non-dischargeable debts.
•          1990:   Period to discharge a student loan extended from five years to seven years.
•          1998:   Seven year period to discharge a student loan eliminated, leaving undue hardship as the only basis for a discharge.
•          2005:   Private student loans become non-dischargeable regardless of whether they are made, insured or guaranteed by a governmental entity or non-profit; test now turns on whether interest would be deductible under the Tax Code.      

Dischargeability of student loans is governed by 11 U.S.C. §523(a)(8) which provides:

(a)    A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt— (8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for— (A) (i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

I.                   I.  Types of Non-Dischargeable Obligations

There are four types of debts which are nondischargeable under 11 U.S.C. § 523(a)(8):

1.                  An educational benefit overpayment made, insured or guaranteed by a governmental unit or made under any program funded in whole or in part by a governmental unit or nonprofit institution.   11 U.S.C. §523(a)(8)(A)(i).

2.                  An educational loan made, insured or guaranteed by a governmental unit or made under any program funded in whole or in part by a governmental unit or nonprofit institution.  11 U.S.C. §523(a)(8)(A)(i).

3.                    An obligation to repay funds received as an educational benefit, scholarship or stipend.  11 U.S.C. §523(a)(8)(A)(ii).

4.                     Any other educational loan that is a qualified education loan under section 221(d)(1) of the Internal Revenue Code.   11 U.S.C. §523(a)(8)(B).

While Section 523(a)(8) broadly relates to debts incurred in connection with higher education, they differ as to the type of obligation involved and the identity of the party involved in making or guaranteeing the debt as shown by the following chart.

Type of obligation	Made, insured or guaranteed by a governmental unit or nonprofit	Not involving a governmental unit or nonprofit
Educational loan	§523(a)(8)(A)(i)	§523(a)(8)(B)
Educational benefit overpayment	§523(a)(8)(A)(i)
Obligation to repay funds received as an educational benefit, scholarship or stipend		§523(a)(8)(A)(ii)

Thus, an educational loan will be non-dischargeable (in the absence of a finding of undue hardship) as long as it is either made, insured or guaranteed by a governmental unit or nonprofit organization or if it is a qualified education loan under Section 221(d)(1) of the Internal Revenue Code.   As discussed below, these definitions encompass most public and private student loans.   In addition to the broad categories of loans, there are two additional categories for obligations to repay benefit overpayments, scholarships and stipends.

A.    An educational benefit overpayment/governmental unit or non-profit

An educational benefit overpayment made, guaranteed or insured by a governmental unit or a nonprofit is the least complicated exception to understand.   

An “educational benefit overpayment” is an overpayment from a program such as the GI Bill under which where students receive periodic payments while they are enrolled in school, but if the students receive payments after they have left the school, that is an educational benefit overpayment.

Matter of Murphy, 282 F.3d 868, n. 7 (5^th Cir. 2002)

B.     An educational loan/governmental unit or non-profit

This subsection has three main components:   1)  a loan,  2) for educational purposes  3) that a governmental or nonprofit makes, insures or guarantees.   Busson-Sokolik v. Milwaukee School of Engineering (In re Busson-Sokolik), 635 F.3d 261 (7^th Cir. 2011); Matter of Murphy, at 870.  

In order for there to be a loan, there must be “(i) a contract, whereby (ii) one party transfers a defined quantity of money, goods or services, to another, and (iii) the other party agrees to pay for the sum or items transferred at a later date.”   In re Chambers, 348 F.3d 650, 657 (7^th Cir. 2003).    Under this definition, a debt for unpaid tuition owed to the educational institution is not a “loan” and is not excluded from discharge as an educational loan.   Chambers, supra; In re Renshaw, 229 B.R. 552 (2^nd Cir. BAP 1999); In re Oliver, 499 B.R. 617 (Bankr. S.D. Ind. 2013).

The educational component refers to the intent of the parties when the loan was made rather than how the funds were actually used.   

Permitting students to discharge student loans in bankruptcy because the student spent the money on social uses, alcohol, or even drugs would create an absurd result. Students who used the loan proceeds to finance an education would retain the burden of paying them even after a chapter 7 discharge; irresponsible students who abused the loans would gain the benefits of discharge. Courts have emphasized two purposes when analyzing § 523(a)(8): (1) preventing undeserving debtors from abusing educational loan programs by declaring bankruptcy immediately after graduating; and (2) preserving the financial integrity of the loan system. Murphy's interpretation would create two perverse effects: (1) Dischargeability would reward irresponsible student borrowers and punish responsible borrowers; and (2) the federal government would have to pay out more to cover the costs of defaulting students' loans. Murphy's interpretation would create the type of absurd result that even rigid textualists seek to avoid.

Matter of Murphy, at 873; see also In re Busson-Sokolik, supra.

The requirement that the loan be made, insured or guaranteed by a governmental unit or nonprofit includes a wide variety of loan programs, including the William D. Ford Federal Direct Loan Program, the Federal Perkins Loan Program, the Federal Family Education Loan Program, Stafford Loans and PLUS Loans (Parent Loan for Undergraduate Students).    Many loans covered by Section 523(a)(8)(A)(i) are made under the Guaranteed Student Loan Program.

The Guaranteed Student Loan Program (hereafter Program), which was established as part of the comprehensive Higher Education Act of 1965, was designed to assure that colleges and students attending colleges would have reasonable access to low interest rate loans. S. Rep. No. 673, 89th Cong., 1st Sess. (1965), reprinted in 1965 U.S.C.C.A.N. 4027, 4030. Under the Program, educational loans from banks, credit unions, educational institutions, and other lenders are insured by the United States Department of Education or by state agencies or nonprofit organizations and reinsured by the Department of Education. 20 U.S.C. §§ 1078, 1084, 1085(d) (1988); see H.R. Rep. No. 595, 95th Cong., 2d Sess. 135, 140 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6096, 6101.   If the borrower fails to make repayments because of death or disability, or is relieved of the obligation to pay through discharge in bankruptcy, the lender is entitled to repayment from the federal government. 20 U.S.C. § 1087; see H.R. Rep. No. 595, at 135, 140, reprinted in 1978 U.S.C.C.A.N. at 6096, 6101.

In re Pelkowski, 990 F.2d 737, 739-40 (3^rd Cir. 1993).   Loans made by nonprofit entities are also included within the scope of nondischargeability.   See In re Vuini, 2012 Bankr. LEXIS 5326 (Bankr. M.D. Fl. 2012)(loan made by Access Group, a 501(c)(3) entity, was non-dischargeable).   Loans made to parents or other persons other than students are included within the scope of non-dischargeable student loans.    In re Pelkowski, supra. 

C.     Obligation to repay an educational benefit, scholarship or stipend

This subsection covers agreements wherein a person receives a stipend or scholarship to attend college in return for an agreement to provide some form of public service such as teaching in an underprivileged area or serving in the Public Health Service.    If the person fails to honor the commitment made, the amounts advanced become repayable and are nondischargeable under section 523(a)(8)(A)(ii).    Burks v. Louisiana (In re Burks), 244 F.3d 1245 (11^th Cir. 2001); U.S. Dept. of Health and Human Services v. Smith, 807 F.2d 122 (8^th Cir. 1986).   

Some courts have interpreted the term “educational benefit” expansively to include  loans which would not fall within the other provisions of Section 523(a)(8).  Rabbi Harryy H. Epstein School, Inc. v. Goldstein (In re Goldstein), 2012 Bankr. LEIXS 6034 (Bankr. N.D. Ga. 2012)(obligation to pay tuition at day school); Carow v. Chase Student Loan Service, (In re Carow), 2011 Bankr. LEXIS 823 (Bankr. D. N.D. 2011)(private student loan); Micko v. Student Loan Fin. Corp. (In re Micko), 356 B.R. 210 (Bankr. D. Ariz. 2006)(loan made by an employee-owned S Corporation which operated similarly to nonprofit student loan provider).  This interpretation is contradicted by a trio of cases involving for-profit truck driving schools.   Scott v. Midwestern Training Center (In re Scott), 287 B.R. 470 (Bankr. E.D. Mo. 2002§; United Resource Sys. v. Meinhart (In re Meinhart), 211 B.R. 750 (Bankr. Colo. 1997); and McClure v. Action Career Training (In re McClure), 210 B.R. 985 (Bankr. N.D.Tex. 1997).    These cases are not consistent in their rationales.  The expansive cases appear willing to bend the law to extend protection to lenders who did not fall within the other provisions of the statute.      In contrast, the courts were definitely less sympathetic to for-profit entities which made the loans in order to generate business for themselves.  

The term “educational benefit” is not defined in the Bankruptcy Code, In re Carow, supra, and no higher court has addressed its meaning.   However, caution should be exercised in following the more expansive cases.    Section 523(a)(8) is an extremely dense statute.   Under the broad reading of “educational benefits,” there would be no reason to define types of nondischargeable student loans since they would all qualify as obligations to repay “educational benefits.”    London-Marable v. Sterling, 2008 U.S. Dist. LEXIS 106452 (D. Ariz. 2008).

D.    A Qualified Education Loan

The addition of “qualified education loans” to Section 523(a)(8) was intended to bring private for-profit student loans into the category of non-dischargeable debts.    Pardo and Lacey, The Real Student-Loan Scandal:  Undue Hardship Discharge Litigation, 83 Am. Bankr. L.J. 179 (Winter 2009).   However, the specific statutory language used which refers to Section 221(d)(1) of the Internal Revenue Code of 1986 leads to  a sea of cross-references within the Internal Revenue Code.    26 U.S.C. §221(d) contains the following definitions:

(d) Definitions.  For purposes of this section—    (1) Qualified education loan.  The term "qualified education loan" means any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses--       (A) which are incurred on behalf of the taxpayer, the taxpayer's spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,       (B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and       (C) which are attributable to education furnished during a period during which the recipient was an eligible student.    Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. The term "qualified education loan" shall not include any indebtedness owed to a person who is related (within the meaning of section 267(b) or 707(b)(1) [IRC Sec. 267(b) or 707(b)(1)]) to the taxpayer or to any person by reason of a loan under any qualified employer plan (as defined in section 72(p)(4) [IRC Sec. 72(p)(4)]) or under any contract referred to in section 72(p)(5) [IRC Sec. 72(p)(5)].    (2) Qualified higher education expenses.  The term "qualified higher education expenses" means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997 [enacted Aug. 5, 1997]) at an eligible educational institution, reduced by the sum of--       (A) the amount excluded from gross income under section 127, 135, 529, or 530 [IRC Sec. 127, 135, 529, or 530] by reason of such expenses, and       (B) the amount of any scholarship, allowance, or payment described in section 25A(g)(2) [IRC Sec. 25A(g)(2)].    For purposes of the preceding sentence, the term "eligible educational institution" has the same meaning given such term by section 25A(f)(2) [IRC Sec. 25A(f)(2)], except that such term shall also include an institution conducting an internship or residency program leading to a degree or certificate awarded by an institution of higher education, a hospital, or a health care facility which offers postgraduate training.    (3) Eligible student.  The term "eligible student" has the meaning given such term by section 25A(b)(3) [IRC Sec. 25A(b)(3)].    (4) Dependent.  The term "dependent" has the meaning given such term by section 152 [IRC Sec. 152] (determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof).

          This definition is used to determine deductibility of interest on student loans.  Unfortunately,  it depends upon a series of definitions within the Internal Revenue Code.    To start with, a qualified education loan is 

•          indebtedness incurred by the taxpayer;
•          to pay “qualified higher education expenses;”
•          incurred on behalf of the taxpayer, the taxpayer’s spouse or a dependent of the taxpayer;
•            which qualified higher education expenses are paid or incurred within a reasonable time after the loan is incurred; and
•          attributable to education furnished while the student was an “eligible student;”
•          but does not include any indebtedness owed to a person who is related to the taxpayer.

Qualified higher education expenses means the cost of attending an “eligible educational institution” reduced by certain amounts excluded from gross income as a result of such expenses and certain scholarships.   26 U.S.C. §221(d)(2).   

An “eligible educational institution” “has the same meaning given such term by section 25A(f)(2)” as well as “an institution conducting an internship or residency program leading to a degree or certificate awarded by an institution of higher education, a hospital, or a health care facility which offers postgraduate training.”   26 U.S.C. §221(d)(2).     Section 25A(f)(2) defines “eligible educational institution” as an institution described in section 481 of the Higher Education Act of 1965 (20 U.S.C. §1088) which is eligible to participate in a program under title IV of the Higher Education Act of 1965.   Section 1088 does not contain a definition of “eligible educational institution” but does contain a definition of “eligible program.”    An “eligible program” is defined as:

(b) Eligible program.    (1) For purposes of this title, the term "eligible program" means a program of at least--       (A) 600 clock hours of instruction, 16 semester hours, or 24 quarter hours, offered during a minimum of 15 weeks, in the case of a program that--          (i) provides a program of training to prepare students for gainful employment in a recognized profession; and          (ii) admits students who have not completed the equivalent of an associate degree; or       (B) 300 clock hours of instruction, 8 semester hours, or 12 hours, offered during a minimum of 10 weeks, in the case of--          (i) an undergraduate program that requires the equivalent of an associate degree for admissions; or          (ii) a graduate or professional program.    (2) (A) A program is an eligible program for purposes of part B of this title [20 USCS §§ 1071 et seq.] if it is a pro-gram of at least 300 clock hours of instruction, but less than 600 clock hours of instruction, offered during a minimum of 10 weeks, that--          (i) has a verified completion rate of at least 70 percent, as determined in accordance with the regulations of the Secretary;          (ii) has a verified placement rate of at least 70 percent, as determined in accordance with the regulations of the Secretary; and          (iii) satisfies such further criteria as the Secretary may prescribe by regulation.       (B) In the case of a program being determined eligible for the first time under this paragraph, such determination shall be made by the Secretary before such program is considered to have satisfied the requirements of this paragraph.    (3) An otherwise eligible program that is offered in whole or in part through telecommunications is eligible for the purposes of this title if the program is offered by an institution, other than a foreign institution, that has been evaluated and determined (before or after the date of enactment of the Higher Education Reconciliation Act of 2005 [enacted Feb. 8, 2006]) to have the capability to effectively deliver distance education programs by an accrediting agency or association that--       (A) is recognized by the Secretary under subpart 2 of part H [20 USCS § 1099b]; and       (B) has evaluation of distance education programs within the scope of its recognition, as described in section 496(n)(3) [20 USCS § 1099b(n)(3)].    (4) For purposes of this title, the term 'eligible program' includes an instructional program that, in lieu of credit hours or clock hours as the measure of student learning, utilizes direct assessment of student learning, or recognizes the direct assessment of student learning by others, if such assessment is consistent with the accreditation of the institution or program utilizing the results of the assessment. In the case of a program being determined eligible for the first time under this paragraph, such determination shall be made by the Secretary before such program is considered to be an eligible program.  20 U.S.C. §1088(b).

An “eligible student” is defined by section 25A(b)(3), which provides:

 (3) Eligible student.  For purposes of this subsection, the term 'eligible student' means, with respect to any academic period, a student who--

      (A) meets the requirements of section 484(a)(1) of the Higher Education Act of 1965 (20 U.S.C. 1091(a)(1)), as in effect on the date of the enactment of this section [enacted Aug. 5, 1997], and

      (B) is carrying at least 1/2 the normal full-time work load for the course of study the student is pursuing.

20 U.S.C. §1091(a)(1) provides

(a) In general. In order to receive any grant, loan, or work assistance under this title, a student must--

   (1) be enrolled or accepted for enrollment in a degree, certificate, or other program (including a program of study abroad approved for credit by the eligible institution at which such student is enrolled) leading to a recognized educational credential at an institution of higher education that is an eligible institution in accordance with the provisions of section 487 [20 USCS § 1094], except as provided in subsections (b)(3) and (b)(4), and not be enrolled in an elementary or secondary school,

Meanwhile, section 1094 refers to

an eligible institution for the purposes of any program authorized under this title, an institution must be an institution of higher education or an eligible institution (as that term is defined for the purpose of that program) and shall, except with respect to a program under subpart 4 of part A [20 USCS §§ 1070c et seq.], enter into a program participation agreement with the Secretary.

            Notwithstanding the difficulty in navigating the statutory cross-references, courts have taken a practical approach to determining whether a lender is an “eligible education institution.”   The government maintains lists of eligible education institutions, notably at https://fafsa.ed.gov.  If an institution is included on the list, it is an eligible education institution and its higher education loans are qualified education loans.    Rumer v. American Educational Services (In re Rumer), 469 B.R. 553 (Bankr. M.D. Pa. 2012); Wills v. Sally Mae Servicing (In re Wills), 2010 Bankr. LEXIS 1478 (Bankr. S.D. Ind. 2010).

            The statutory definitions establish several limitations on what loans are considered qualified educational loans.    First, the debtor must be a taxpayer.   In the case of a Canadian resident alien who did not file tax returns in the United States, the Court found that the debtor was not a taxpayer and therefore his debts were dischargeable.    In re LeBlanc, 404 B.R. 793 (Bankr. M. D. Pa. 2009).    The provision addressing “qualified higher education expenses” would appear to exclude debts relating to private elementary and secondary school tuition and for-profit vocational schools.     Finally, because the definition of “eligible student” incorporates an individual enrolled at an eligible institution, a qualified educational loan would not apply to an individual who applied to but was not accepted by an eligible institution.

II.                 II.  Undue Hardship

If a student loan or other obligation falls within the language of Section 523(a)(8), the only way to obtain a discharge of the obligation is a finding of “undue hardship.”   While undue hardship is not a defined term, most courts follow a similar test.

 The Second, Third, Fourth, Fifth, Sixth, Seventh, Ninth, Tenth and Eleventh Circuits follow the Brunner test for undue hardship. Krieger v. Educational Credit Management Corp., 713 F.3d 882 (7th Cir. 2013); Spence v. Educational Credit Management Corp., 541 F.3d 538 (4^th Cir.2008); Educational Credit Management Corp. v. Mosley, 494 F.3d 1320 (11^th Cir. 2007); Barrett v. Educational Credit Management Corp., 487 F.3d 353 (6^th Cir. 2007); Educational Credit Management Corp. v. Pollys, 356 F.3d 1302 (10^th Cir. 2004); In re Gerhardt, 348 F.3d 89 (5^th Cir. 2003);  United Student Aid Funds, Inc. v. Pena, 155 F.3d 1108 (9^th Cir. 1998);  Pennsylvania Higher Education Assistance Agency v. Faish, 72 F.3d 298 (3^rd Cir. 1995); Brunner v. New York Higher Education Services Corp., 831 F.2d 395 (2^nd Cir. 1987)       Under the Brunner test, the debtor has the burden of proof to establish that:

(1)     he cannot maintain, based on current income and expenses, a "minimal" standard of living for himself and his dependents if required to repay the loans;

(2)     additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and

(3)     the debtor has made good faith efforts to repay the loans.

The Eighth Circuit applies a totality of the circumstances test which considers similar factors.   

Reviewing courts must consider the debtor's past, present, and reasonably reliable future financial resources, the debtor's reasonable and necessary living expenses, and "any other relevant facts and circumstances." (citation omitted). The debtor has the burden of proving undue hardship by a preponderance of the evidence. The burden is rigorous. "Simply put, if the debtor's reasonable future financial resources will sufficiently cover payment of the student loan debt - while still allowing for a minimal standard of living - then the debt should not be discharged.

Educational Credit Management Corp. v. Jesperson, 571 F.3d 775, 779 (8^th Cir. 2009).  The First Circuit has declined to adopt a specific test.    Nash v. Connecticut Student Loan Foundation, 446 F.3d 188 (1^st Cir. 2006).   

            The phrase “undue hardship” was taken from the Report of the Comm'n on the Bankr. Laws of the United States, H.R. Doc. No. 93-137, Pt. II § 4-506 (1973), reprinted in Collier on Bankruptcy, App. Pt. 4(c) at 4-710 (15th ed. rev. 2003).   Pollys, supra.   The Commission articulated a standard of ability to repay the student loans while maintaining a minimal standard of living to that considered by Courts under the Code.   

The Commission noted that in order to determine whether nondischargeability of the debt will impose an "undue hardship,"

the rate and amount of his future re-sources should be estimated reasonably in terms of ability to obtain, retain, and continue employment and the rate of pay that can be expected. Any un-earned income or other wealth which the debtor can be expected to receive should also be taken into account. The total amount of income, its reliability, and the periodicity of its receipt should be adequate to maintain the debtor and his dependents, at a minimal standard of living within their management capability, as well as to pay the education debt.

Pollys, at 1306-07.    Thus, the Brunner test can be said to rely on similar factors to those articulated by the Bankruptcy Reform Commission.

    When Congress originally adopted the undue hardship standard, it provided an alternative path to discharging student loans for those who had been paying on their loans for less than five years.   Today it is the sole vehicle for discharge of student loans.   Some courts have applied Brunner in such as strict manner as to make it all but impossible to meet.    In reviewing the cases, the Tenth Circuit stated:

Many subsequent courts employing the Brunner analysis, however, appear to have constrained the three Brunner requirements to deny discharge under even the most dire circumstances. See, e.g., Healey v. Mass. Higher Educ. (In re Healey), 161 B.R. 389, 395 (E.D. Mich. 1993) (debtor failed first Brunner prong, because, although she was unable to maintain a "minimal" standard of living on her current income, she did not demonstrate that she was "making a strenuous effort to maximize her personal income within the practical limitations of her vocational profile"); In re Walcott, 185 B.R. 721, 723-24 (Bankr. E.D.N.C. 1995) (debtor failed second Brunner prong because, since a $9.00 per hour position teaching literacy classes was "the highest hourly wage she has ever earned," "her current prospects appear brighter than at nearly any other time since her graduation"); In re Roberson, 999 F.2d at 1137 (debtor, who was divorced, unemployed, and living in a one-room apartment that did not have even a kitchen or toilet, failed second Brunner prong because he did not present a "certainty of hopelessness"); In re Stebbins-Hopf, 176 B.R. 784, 788 (Bankr. W.D. Tex. 1994) (debtor, who had nerve damage, bronchitis, and arthritis, and whose daughter had epilepsy, mother had cancer, and grandchildren had asthma, failed good faith prong because "she intentionally chose to help her family financially").

Pollys, at 1308.   One outspoken judge described the Brunner test as “let’s make it as tough as humanly possible to discharge a student loan.”    Speer v. Educational Credit Management Corp. (In re Speer), 272 B.R. 186, 193 (Bankr. W.D. Tex. 2001)(finding undue hardship where debtor lived in a travel trailer and his only luxury was $48 per month for cable TV).   Another judge has stated that Brunner is “too narrow, no longer reflects reality and should be revised.”    Roth v. Educational Credit Management Corp., 490 B.R. 908 (9^th Cir. BAP 2013)(Pappas, J., concurring).

            Several circuits have attempted to minimize the harsh effects of Brunner by allowing at least the possibility of a “partial discharge” of student loan debts.    In re Miller, 377 F.3d 616 (6^th Cir. 2004); Graves v. Myrvang (In re Myrvang), 232 F.3d 1116 (9^th Cir. 2000);   Alderete v. Educational Credit Management Corp. (In re Alderete), 412 F.3d 1200 (10^th Cir. 2005); Hemar Ins. Corp. of America, v. Cox (In re Cox), 338 F.3d 1238 (11^th Cir. 2003).

            In order to establish undue hardship, the debtor must file an adversary proceeding.   Some states have taken the position that their Eleventh Amendment immunity prevents  them from being sued for a determination of undue hardship[1].    However, the Supreme Court rejected this position using the legal fiction that a complaint to determine dischargeability was not a “suit” under the Constitution.    Tennessee Student Assistance Corp. v. Hood, 124 S.Ct. 1905 (2004).     The Supreme Court has also held that a chapter 13 plan may not properly provide for discharge of a student loan but that an unobjected to provision for discharge in a plan is enforceable.   United Student Aid Funds, Inc. v. Espinosa, 130 S.Ct. 1367 (2010).

            Under current law, discharge of a student loan is a precarious exercise.    In order to prove that he has an undue hardship, a debtor must file an adversary proceeding.    However, a pro se litigant will  most likely be  unable to prove the required elements which are technical in nature and a debtor who can afford to hire an attorney will likely have too many resources to establish undue hardship.   As a result, the only feasible way to obtain a hardship discharge may be to find an attorney who will represent the debtor on a pro bono or reduced fee basis.   

III.             III.  A Few Thoughts About Reform

The trend from 1976 to 2005 has been to reduce the dischargeability of student loans.    The nondischargeability of student loans was originally intended to prevent unscrupulous debtors from gaining an education and then discharging their debts and to preserve the solvency of the student loan system.   Federally subsidized and insured student loans exist to encourage individuals to invest in their education and better support their families and contribute to society.   The nearly absolute non-dischargeability of student loans stands in opposition to the very purpose of encouraging education through debt.    If a student obtains an education burdened by unmanageable debt, it is unlikely that he will be a productive member of society.   A decision made at a time of youthful immaturity can burden an individual for the remainder of his adult life.   

Section 523(a)(1) of the Bankruptcy Code provides a helpful contrast.    Under Sections  523(a)(1) and 507(a)(8)(A), federal income taxes may be discharged for years where the return was due more than three years prior to bankruptcy and the return was actually filed more than two years before bankruptcy.    This provision allows the government a reasonable time to collect delinquent federal income taxes[2].   If the taxes which fund our government can be discharged after a reasonable period of time, why should the same not  be true for student loans?

If Congress is not willing to generally allow discharge of student loans after a period of time, some reforms it might consider include:

•    Allowing private student loans to be discharged after seven years;
•    Allowing student loans to be discharged in chapter 11 or chapter 13;
•   Adopting a definition of “undue hardship” which does not require proof of absolute desolation; and
•    Allowing student loans to be discharged in a summary proceeding without the necessity for a costly adversary proceeding.

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[1] The Eleventh Amendment protects a state from being sued without its consent.    

[2] In contrast, trust fund taxes are never dischargeable.