With student loans, how should we define undue hardship?

Current standard no longer matches the realities of many borrowers

Obtaining a discharge of a student loan debt is difficult. The law permits discharge only upon a showing of undue hardship. The problem with this standard is how it is interpreted by most bankruptcy courts in the nation. The courts have historically used a standard so strict that most borrowers have to be virtually destitute before a court will approve their discharge.

Recently, a few cases have appeared where desperate debtors have asked federal courts of appeals to modify that standard. And one case could go to the U.S. Supreme Court. That Court has never ruled on this issue and it could change the standard from one that was developed in the 1980s.

Outdated standard

Part of the problem with the current interpretation of the undue hardship standard is that the court decision was made when the ability of debtors to discharge student loans was very different than today.

In 1987, when the Brunner case was decided, a debtor was entitled to discharge their student loans if more than five years had passed from when their loans went into repayment.

The extraordinarily strict requirements of the Brunner test, which essentially requires a debtor prove the "certainty of hopelessness" for their future, may have made sense at that time to prevent debtors from immediately asking for a discharge of their student loans upon graduation.

A solution in search of a problem

In fact, there is little evidence that this was ever a problem. Nonetheless, Congress has proceeded to increasingly tighten the requirement that a debtor waits for a period of time before attempting to discharge their debts. In 1987, it was five years, then seven years, and most recently, it was eliminated entirely, meaning undue hardship is the only avenue for bankruptcy discharge with a student loan.

Additionally, the collections limitations that one time existed have likewise been eliminated; meaning a balance on a student loan can follow a borrower to their grave. With the rapid increase in the cost of most secondary education has meant for many individuals student loans are the only way they can afford college. This increasing need has coincided with the worst decade of job growth since the Great Depression, leaving many graduates with few options for jobs.

This means far more borrowers are in need of the genuine debt relief promised by the Bankruptcy Code, but that relief is denied to all but the most desperate of individuals. While some argue that borrowers sign an agreement and should be held to that agreement, it holds little force when a debtor can discharge far more trivial debts, such as credit cards and gambling debts. Accepting a student loan should not be transformed into indentured servitude.

At least one court of appeal has adopted a more reasonable "totality of the circumstances" test to assess undue hardship. It is unclear if the Supreme Court will take any of the cases pending, and equally unclear how they may rule, should the take a case.