Student loans are the largest form of consumer debt. In 2011, student debt surpassed $1 trillion nationally, which amounts to an average of $17,000 in student loan debt per person. On average, the amount of loan debt a student graduated with in 2010 was $25,250. Unfortunately, unlike almost all other kinds of debt, getting rid of either public or private student loan debt without dying or paying it in full is nearly impossible. In fact, federal loans have not been eligible for discharge in bankruptcy since 1978 and, in 2005, this treatment was extended to private student loans as well.
Specifically, student loan debt can currently only be discharged upon a showing of “undue financial hardship.” The usual standard to determine whether an individual has a claim of undue hardship is based on the three-part “Brunner Test.” The “Brunner Test” requires a debtor to prove each of the following:
1. Based on current income and expenses, the debtor cannot maintain a minimal standard of living for the debtor and dependents if forced to pay off student loans;
2. Additional circumstances exist indicating that the debtor’s current state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
3. The debtor has made good faith efforts to repay loans.
Courts generally apply the three prongs very stringently. However, a recent court ruling and proposed California and federal legislation may affect the dischargeability of student loans for both Californians and other Americans alike.
Hedlund v. The Educational Resources Institute and Pennsylvania Higher Education Assistance Agency
Nearly ten years after Hedlund initially brought his lawsuit to determine the dischargeability of his student loan debt, on May 22, 2013, the Ninth Circuit Court of Appeals released its opinion in Hedlund v. The Educational Resources Institute, Inc., and Pennsylvania Higher Education Assistance Agency. The case may make it easier for student loan debtors to have their student loans discharged in bankruptcy.
In Hedlund, the Ninth Circuit found that the Bankruptcy Court had properly applied the Brunner test when it examined Hedlund’s efforts to find a better job and found that his expenses were mostly reasonable. In addition, the Ninth Circuit Court also ruled that the Bankruptcy Court correctly examined Hedlund’s efforts to negotiate a payment plan, and that his only option would create an undue hardship that would require the then-35 year old Hedlund to make loans until he was at least 65 years old. The recent decision by the Ninth Circuit establishes that debtors may not have to go to extreme efforts to repay their loans, a debtor may have some unreasonable expenses, and a 30-year repayment term may not be reasonable.
Proposed Federal Legislation
The Private Loan Bankruptcy Fairness Act of 2013 (H.R. 532) and The Fairness for Struggling Students Act of 2013 (S. 114)
These bills were introduced to the U.S. House of Representatives and U.S. Senate in February 2013 and January 2013 respectively. The proposed legislation hopes to have private student loans lumped with all other kinds of debt, making student loan debt fully dischargeable in bankruptcy. The bills would repeal the portion of the 2005 bankruptcy law overhaul, which removed the option for debtors to discharge outstanding private student loans in bankruptcy court. Notably, federal loans would not be impacted by this legislation.