I'll never forget a case I presided over while still a bankruptcy judge in the District of Arizona, the case of a woman I'll call Myrna. Myrna had taken out student loans in the early1970s, and then decided to work in public health as a children's psychologist for San Diego County, CA. Myrna bought a home and helped troubled children, and she made sporadic payments on her loans over the years.
Years later, Myrna retired, sold her home, and she and her husband moved to Arizona. Her husband did odd jobs, and they collected social security. Then the student-loan debt collector came-a-knocking. In 2010, he demanded immediate payment. Myrna filed a bankruptcy petition in response. Myrna had few records of her payments over the years, and, tellingly, the collector was having difficulty calculating the total amount owed. By the time Myrna appeared in my courtroom for trial, she was seventy-three-years old, and she owed $584,854.99.
The creditor presented no evidence, but Myrna carried the burden of proof. She had little documentation to support her repayment of her student loans or her salary over the years, because she had taken out the loans so long ago.
I saw incredible inequities in this case. Myrna did not meet all of the legal criteria to have her student loans forgiven. However, if she had filed her bankruptcy petition before 1998, the law in place at the time would have forgiven her loans after seven years. If she had filed a bankruptcy petition prior to 1976, she would have received forgiveness of her loans as any other consumer debt. But Myrna didn't think about bankruptcy back then.
Myrna had also worked in the public health sector, which under later law, would have forgiven her loans after 10 years of service. So, using those factors, I decided that she only needed to pay for three more years, based upon her income level, and the student loan debt would be forgiven. The parties later stipulated to a form of judgment consistent with my ruling.
How did we ever get to such a place? Under the prior bankruptcy law, student loans were treated like any other consumer debt. They were routinely forgiven. But in 1976, an Amendment to the Higher Education Act that also amended the bankruptcy law changed the game. It required that education loans not be forgiven unless a period of five years after the loan was entered into had passed or the borrower could show that he or she would experience an "undue hardship" if the loan were repaid. It was left up to the courts to determine what undue hardship meant. The Bankruptcy Reform Act of 1978, the "Bankruptcy Code," incorporated the changes.
In 1990, the Crime Control Bill changed the waiting period from five to seven years, and added additional types of loans that were difficult to forgive under the Bankruptcy Code. Finally, on October 7, 1998, President Clinton signed the Higher Education Act Amendments, which eliminated the waiting period altogether. Then, only undue hardship could "free" a borrower from student loan debt in bankruptcy.
Today it is extremely difficult for student loan borrowers to get relief in bankruptcy. Under the current bankruptcy law, borrowers must meet the test set forth in a 1985 case called "In re Brunner," which introduced three criteria of "undue hardship" borrowers must meet before their debt is forgiven: The borrower is living at the poverty level, will continue to do so for the foreseeable future, and has made good faith efforts to repay the student loan debt.
If a debtor cannot meet one of the criteria, the debt cannot be discharged. "In re Brunner" is followed, with some modification, in nearly all of the United States Circuit Courts of Appeal.
This standard is unjust and misguided. It's time to reverse the damage done by these laws.
Too many Americans are hampered in their ability to advance economically by student loans. Moreover, there is a racial justice element to this. Research has shown that Black and Hispanic students are disproportionately affected by the student debt crisis. They are more likely to attend for-profit colleges that don't lead to high-paying careers, and they borrow more money to attend. Black college graduates owe an average of $25,000 more in student loan debt than white graduates.
We have a crisis. At the end of the first quarter 2022, Americans owed $1.59 trillion in student loan debt according to the Federal Reserve Bank of New York, an increase of $14 billion over the fourth quarter 2021. On May 31, 2022, the Department of Education announced that it would automatically wipe out $5.8 billion owed by 560,000 borrowers who attended the for-profit Corinthian Colleges because of the chains' "bad behavior."
President Biden is considering providing relief to borrowers via executive order. But this is a short-term solution that won't help future borrowers. Means-testing has been proposed as another solution to loan forgiveness, but in bankruptcy, means-testing is cumbersome, complex, and ineffective. Why should means-testing work as to student-aid loans or grants?
It is time to change the bankruptcy law to the way it was in the past. The relief given to Wall Street should be extended to Main Street and beyond.
Let bankruptcy laws be revised to forgive student loans. That's how we get out of this mess.
Sarah Sharer Curley served as a United States Bankruptcy Court Judge for the District of Arizona from 1986-2014, and as the Court's Chief Judge from 2001-2005. She was the first woman in Arizona history to serve judge and later chief judge of Arizona's federal bankruptcy court.
The views in this article are the writer's own.
