How do you feel about discharging student loan debt in bankruptcy?
The American Bar Institute (ABI) Consumer Bankruptcy Committee conducted a poll on what changes would attendees like to make to student loan discharges that I found interesting:
10% Recommended no changes – leave it as it is
22% Discharge all student loan debt
26% Discharge all student loan debt after 7 years
43% Discharge of student loan debt is based upon a determination of hardship under a new standard
How did I vote? I chose #4, create a new standard for the present undue hardship. While I am a strong advocate for student loan relief, I believe that caution and good sense is important. I’ve always advocated for a few smaller “fixes” which would do a lot to preserve the underlying system. Things like:
How Would I Fix Student Loans?
- Reduce federal loan interest rates from the average of 6.8 to 3%
- Apply Public Service Loan Forgiveness (PSLF) for all federal loans (Direct and FFEL)
- Allow PSLF to apply 10% forgiveness per year, rather than 100% forgiven after 10 years
- Amend the Income Driven Plans to exclude a spouse’s income (who did not receive the benefit of the education
- Make it more straightforward to discharge non-qualified education loans – for private loans
- Require all parties (originators, lenders, investors, schools) to own a piece of any default – rather than the taxpayers and student who bear 100% of the default now.
- Require accountability and allow consumers’ private causes of action to sue a loan servicer who misrepresents the options to borrowers who find themselves owing a lot more than they should have
- Eliminate the taxable event at the end of all Income Driven Plans
- Prevent mortgage underwriters from using student loan balances as part of the loan/debt ratio
- Allow borrowers to separate their loans if they consolidated as husband and wife under a program that has been disbanded.
- Relax and update the Brunner standard as suggested by National Association of Consumer Bankruptcy Attorneys
I believe these things would preserve our student loan system and make it so much better than what it is now.
It is no secret that bankruptcy case law has not treated student loan debt well over the years. Most states use an old Brunner standard from the 80s, which despite being very obsolete, has been applied in such a fashion that it is nearly impossible to win. Many Judges don’t like this obsolete standard but as it is the law, they are duty bound to follow it. This is one of the reasons that our law firm is focused on things other than the Brunner standard.
I don’t believe all student loan debt should be discharged. Many of us obtained a good education and will benefit our entire careers from that education. I also wouldn’t be an attorney today if it wasn’t for the student loan programs. A short term hardship should not allow for a complete 100% discharge. But it’s very clear that many of our clients were snookered by shiny brochures and fraudulent for-profit schools, and their lives bear the long term impact of that bad decision – something they can’t shake decades later. And the federal system is not transparent, and frankly there are so many problems as noted above in my recommended changes, it’s hard to summarize quickly.