Degrees of Inequity: A Policy and Strategic Alternative Assessment to Identify a Twenty‐First Century Definition of Undue Hardship for Student Loan Debt in the United States

Abstract

This study was undertaken to address issues resulting from the vagueness of imprecisely defined legislative language located in the Bankruptcy Reform Act of 1978 (Public Law 95-598) and subsequent policies, regulations, and laws such as the Bankruptcy Abuse Prevention and Consumer Protection Act (Public Law 109-8); which relate to the dischargeability of federally insured student loans.

Prior to Public Law 95-598, student loans could be discharged with de minimis limitations, but undertaking the same task afterward became harder due to a lack of clear Congressional guidance regarding the term “undue hardship” used in the law. As a result, bankruptcy courts created the Brunner test and the Totality test to determine discharge eligibility, and these tests serve as de facto national standards.

In the absence of a declarative ruling from the Supreme Court—or preferably, legislative direction—petitioners will continue to be subject to different circuit-based juridical standards to discharge student loans. A related focus of this study was to examine student loan affordability in respect to contemporary living conditions.

The major findings of the study acknowledge agencies and courts have administrative discretion, but the Brunner and Totality tests are vastly divergent, so similarly situated debtors in different jurisdictional venues will experience dissimilar outcomes under the same law. Secondly, what was an undue hardship in 1978 is vastly different than what constitutes an undue hardship today. Finally, the discharge standards are outdated and require a contextual revision to reflect contemporary life.

The major recommendations from the study include revamping the discharge tests, aligning loan interest rates with inflation, limiting collection fees, revising satisfactory academic progress requirements, ending wage garnishments without advance notification, reinstituting the statute of limitations, and clarifying/defining national undue hardship standards, with adjustments for regionally-based costs.

These recommendations acknowledge that the government has the right to ensure that its loans are collected, and the responsibility to not be so oppressive in its enforcement pursuits that educational discharge equities are elusive and promotes poverty by requiring petitioners to be impoverished in order to receive a discharge. Historically, the federal government’s policies on promoting postsecondary education as an investment is Janus-faced when juxtaposed with its policies on repayment of that investment. Implementing these recommendations will lead to the fresh start supported by Congress in the Bankruptcy Code, ending the system of two national student loan discharge standards with their dual degrees of inequity.