Defining the Brunner Test's Three Parts: Time to Set a National Standard for All Three Parts to Determine When to Allow the Discharge of Federal Student Loans

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I. INTRODUCTION

Since the origin of the modern Bankruptcy Code, (1) when federal student loans were dischargeable in bankruptcy, it has become increasingly more difficult to discharge those loans in any bankruptcy proceeding. Federal student loans have become essentially non-dischargeable, absent the showing of undue hardship on the part of debtor to repay those loans. (2)

Most bankruptcy jurisdictions have incorporated a test in determining whether undue hardship exists from a case out of New York: Brunner v. New York Higher Education Services Corporation (In re Brunner). (3) The Brunner Test has since been adopted by most of the Circuit Courts as the undue hardship standard to determine whether a student/debtor can have their federal student loans discharged in a bankruptcy proceeding. (4) Congress has chosen never to define what exactly undue hardship means, even with all of the changes Congress has made to the Bankruptcy Code over the last forty years, and has decided to leave it for the bankruptcy courts to determine. (5) This has been the major reason, or cause, for the problems with the bankruptcy system regarding the discharge of federal student loans.

The current standard of determining whether a debtor can discharge their federal student loans has been judicially defined too harshly by most of the bankruptcy courts. The Brunner Test has to be both loosened and clearly defined by the Bankruptcy Code to accommodate the reality of the economic situation in this country. Taking the definition of "undue hardship" away from the judges and courts and clearly stating a standard within the Bankruptcy Code allows a uniform approach to the concept of discharging debtor's federal student loans. This article is not advocating a blanket-discharge policy, but one that will consider the original intent of the Bankruptcy Code, along with the reality of the country's situation.

This country is headed for a major problem with the amount of federal student loan debt that exists and we must prepare ourselves, as a nation, for what is going to be the reality of the situation. All of the present plans, as discussed below, are attempts to delay, avoid, or ignore the immense situation that is the federal student loan debt in this country. Federal student loan debt is not going away, nor is it shrinking, and it is only going to get worse if we continue to ignore the fact that the massive debt exists and many debtors cannot pay the federal student loans back.

II. FEDERAL STUDENT LOAN DEBTS AND PLANS TO REPAY THEM

Federal student loans have been around for a very long time, but not as they exist today. The federal student loan program began with the National Defense Education Act of 1958, which established the currently named Perkins Loans program. (6) Later, the Higher Education Act of 1965 established the Stafford Loan program, which provides federal funds for low-interest loans to students to attend college, and is the commonly known federal student loan program today. (7) Under these loan programs, the federal government insures or guarantees the lenders that the federal government will reimburse them for the student loans in the event of a student/debtor's default. (8) Over the decades, the amount of student loan debt students have been borrowing has increased at a dramatic pace. (9)

The federal student loan debt problem is ever-increasing and only getting worse. Every year the amount of student loan debt is growing and, along with it, the default rate on student loans is rising. (10) We, as a society, have to prepare for the eventual reality of the federal student loan default issue and the impact that it will have on our economy if the debts are not made dischargeable in bankruptcy proceedings. This could result in economic situations where people are not able to spend on consumer goods because they cannot relieve themselves of their federal student loan burden. (11) For example, some believe that this situation has already hindered the housing market recovery in this country. …