Marginal Effects of a Complete Dischcarge of Student Loans

Article excerpt

I. INTRODUCTION

In the United States, an individual who meets the qualifications is able to get student loans from the federal government to help them finance their higher education. There is a federal law in place that is designed to deter individuals from abusing and misusing this system. In Chapter 11 of the United States Code §523(a)(8), an individual who has received these educational loans is barred from having them discharged under bankruptcy law, unless one exemption requirement is meet. The loan may be discharged if repaying it will impose an "undue hardship" on the debtor or the debtor's dependents.1 While this rule seems somewhat self-explanatory, there has been great debate over the undue hardship requirement. One of the reasons for this is that some courts are allowing partial discharge of the loan debt when they find undue hardship, and other courts are allowing complete discharge of the loan debt when they find undue hardship. Because this disparity in application of the law can have grossly different outcomes for similarly situated debtors, there needs to be standardized rule that is followed in all courts.2

II. HISTORY OF STUDENT LOANS IN BANKRUPTCY

In 1976 the United States Congress codified the first bill that made, as a general rule, student loans nondischargeable.3 This law came about as a result of the concern for the potential abuse of a loophole in the government's student loan program.4 This potentially abused loophole, which was abused more in theory than in fact, allowed students to completely discharge their guaranteed loans under the old Bankruptcy Act.5 In 1973, this concern was brought to the attention of the Congressional Committee on Bankruptcy. The Commission found that this problem was not a serious threat, but they concluded that it had the potential to be one.6 This finding, along with the public's perception that this was a real problem, eventually prompted Congress to pass the Education Act of 1976.7 Eventually, this law was reformed somewhat and came into being as the original version of §523(a)(8).8 That law allowed student loans to be discharged if the individual had petitioned for the discharge five years after they began repayment of the loan, or there was found to be undue hardship on the debtor as a result of the loan repayment. In 1998, § 523(a)(8) was reformed to only allow discharge of student loans if undue hardship was found. section 523 no longer had the time stipulation requirement.9

III. UNDUE HARDSHIP

Determining what constitutes an undue hardship and what does not is not a finite science. There are four main tests that courts use to determine whether undue hardship exists. While they may all vary from one another in focus and application, they all require the debtor to demonstrate extenuating circumstances and a certainty of hopelessness to qualify as undue hardship.10 A definition of undue hardship that is commonly accepted and followed "require[s] a three-part showing: (1) that the debtor cannot maintain, based on current income and expenses, a 'minimal' standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans."11

A. Unfairness of the "Strict Approach"

If undue hardship has been found in the past, most courts have allowed a complete discharge of the student loan, no matter how great or how small the debt may be.12 This is known as the "strict approach," due to the fact that the court is reading §523(a)(8) very strictly and coming to the conclusion that if undue hardship is found than the law says that the debtor is completely discharged from the debt. Those who follow this interpretation feel that the language is unambiguous and cannot mean anything else. …