The House of Delegates for the American Bar Association recently passed Resolution 512 urging Congress to amend the Bankruptcy Code to permit student loans to be discharged in bankruptcy without proving "undue hardship" as is currently required. The resolution was co-sponsored by the Young Lawyers Division, the Law Student Division and the Standing Committee on Paralegals. The Young Lawyers Division submitted a report in support of the resolution (the "YLD Report") which discussed the history of student loans and borrowers' ability to discharge them bankruptcy.
There is no question discharging student debt in bankruptcy is a hot political topic worthy of ABA attention. The Biden administration has forgiven over $9 billion in student debt and many congressional leaders call for complete student debt forgiveness. Since March 27, 2020, pursuant to the Coronavirus Aid, Relief and Economic Security Act, repayment of federal loans has been frozen. The freeze was extended several times and will not expire until at least January 31, 2022. We also wrote about the recent Second Circuit decision—Homaidan v. Sallie Mae, Inc.—which will make it easier for borrowers to discharge certain student debt in bankruptcy, even under existing law. The YLD Report explains how young lawyers are particularly affected: the average debt for law school graduates is around $145,000 (although the default rate for law school grads is traditionally better than the pre-freeze 11% figure for all student loan borrowers).
There have been limits on the ability to discharge student debt since the Education Amendments Act of 1976, when the (inflation adjusted) average cost of tuition for one year of higher education was around $2,500. In the following 45 years, tuition, and subsequently average debt loads, have exploded. As one example, inflation adjusted tuition and fees for one year of Harvard Law School in 1973 was around $13,000. In 1993, it had increased more than 100% to roughly $28,000 in today's dollars. Now, Harvard Law students can expect tuition and fees alone to be just about $70,000 a year—never mind room and board: likely to exceed $25,000 a year.
Originally, the student debt exception to discharge was time-limited. In the Education Amendments Act of 1976, discharge of student debt was prohibited for the first five years of loan repayment unless the debtor could establish undue hardship. Stricter restrictions on discharge grew over time as access to education loans increased. The Student Loan Default Prevention Initiative Act of 1990 extended the student debt discharge exception to seven years, and the Higher Education Amendments Act of 1998 amended the Bankruptcy Code so that all federally guaranteed student loans were exempt permanently without a showing of undue hardship. The discharge exception was expanded to include nearly all education loans—including those with no federal guarantee—by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. For some debtors in bankruptcy, student loans are the main concern. The YLD Report notes a study of over one thousand bankruptcy cases in which almost one third involved student loan debt. For filers with any student debt, their student loans made up 49% of total debt on average. Even though student debt makes up such a large portion of overall debt, because of the undue burden standard, it is almost never discharged. But instead of seeking a return to a time-limited bar on discharge which existed from 1976-1998, Resolution 512 urges Congress to do away with the undue hardship requirement entirely.
As Herbert Stein once observed: if something cannot go on forever, it will stop. Total student debt cannot outpace inflation at the same rate as it has for the last 50 years without radical changes to the higher education market. But the ABA should be careful about supporting solutions that make relief too easy. For most just-graduated (or just-dropped out) student borrowers, the incentives for bankruptcy are all aligned in favor of filing: their student loan principal will never be higher, they do not own anything to be liquidated, entry level income is (usually) at a career low, and they can wait the until their credit report clears to access credit markets again—usually for a mortgage (the median age for a first-time homebuyer in 2019 was 34). There are many ways to address the perceived problem of student debt loads unmoored from economic reality. Amending the Bankruptcy Code is only one option, and one that does nothing to address the out-of-control costs of higher education. The ABA is surely addressing the concerns of many of its members; hopefully whatever solution ultimately arises will balance the concerns of stakeholders in the education debt market.
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