Thoughts on Student Loans and Debt

It is that time of year when college bound students are thinking about getting their school supplies ready to take to college or university. One thing however, that probably is not on the mind of most of these students is the amount of student debt they are accumulating. This problem becomes very real when students graduate and are faced with the problem of how they are going to repay these debts.

Fast forward, ten or twenty years, and many borrowers are still struggling to pay their student loans. Although the number of people filing for bankruptcy has risen over the past few decades, the number of people that are able to have their student loans discharged has lessened. This is because Congress changed the law to make discharging student loans difficult.  A person must file a law suit within the bankruptcy and to win the law suit is difficult.  The Bankruptcy Code allows for discharge of student loan debts if there is undue hardship to the borrower. However, the code does not define what undue hardship consists of. Therefore, judges started applying a three-prong standard, commonly called the Brunner test. These are three factors in this test: 1. Individuals must prove they made a good-faith effort to pay the loan by finding work and minimizing their expenses; 2. Debtors must also show they could not maintain a minimal standard of living based on their income and expenses if they had to repay the debt; 3. the court must consider whether that situation is likely to persist well into the future.

The Brunner Test was created in 1987 case when Ms. Brunner sought a discharge of her student loans less than a year after she got a master’s degree. There was no attempt by Ms. Brunner to pay the obligation.  In 1987 under the then existing law, this made sense because even if debtors could not pass the test, their debts could be discharged in bankruptcy five years after their repayment period started. Student loan bankruptcy law changed and changed again over the years; in 1998, the waiting period was eliminated altogether and now, all debtors must prove undue hardship to erase their private and federal student debts.  Congress is at war with secular education; non-dischargability of student loan is one more weapon it uses.  Also, the universities and colleges have no incentive to deter people from borrowing as that borrowed money goes directly to their bottom line and endowments.  We have an education problem and it needs to be fixed.

However, times, they may be a-changing.  The amount of student loan debt has increased to the trillions of dollars, perhaps more than the mortgage crises of 2008.  Some bankruptcy judges are now questioning the application of the Brunner test; it is a harsh standard and it is simply too burdensome for debtors.  Borrowers have become indentured slaves, a slavery which was outlawed when we broke from England in 1776.  Certain judges have applied a “totality of circumstances” which allows a greater leeway to determine if a borrower has made a good faith effort to pay the loan and determine at what point will we give a person a fresh start rather than keep the jack boot of oppressive debt on the neck of an American citizens.

Today, there are millions of people who are facing default on their student loans. For the debtor, this default can lead to serious ramifications including garnishment of wages and possible withholding of tax refunds. For the country, this loan charade has major implications as presently, these people cannot buy cars, houses and fully participate in our capitalist economy; this leads to low economic growth for the country.  If you find yourself in a situation where you are not able to pay your loans and are facing default or have defaulted contact us for help at 215-822-2728.  Written by William D. Schroeder, Jr. with credit also to Mita Solanki.