A Growing Student Debt Crisis

As college costs have skyrocketed, student debt in America has now reached a whopping $1.8 trillion in outstanding loans, impacting nearly 45 million people. In total, 92 percent of those loans are federally owned. While defaults, payments, and interest have been frozen through September due to the pandemic, prior to the freeze, 11 percent of student loans were ninety days delinquent or in default.

While student debt is primarily thought of as an issue for young people, an analysis by the American Association of Retired Persons (AARP) found that Americans over the age of fifty account for an increasingly large share of the $1.8 trillion. In total, this group owed $289 billion as of 2018.

Moreover, the AARP report found that, in 2015, nearly one in three Americans between the ages of fifty and sixty-four were in default on those loans. Meanwhile, according to 2018 data from the Consumer Financial Protection Bureau, nearly 40 percent of student borrowers age sixty-five and older were in default.

Still, most student borrowers are between the ages of twenty-five and forty-nine. That demographic also owns the lion’s share of the debt.

Biden, the Brunner Test, and “Undue Hardship”

Bankruptcy courts have not been friendly to student borrowers. That’s at least partly attributable to Biden. In 2005, “the senator from MBNA,” so named for his close relationship with the credit card company that was also his largest donor, was one of eighteen Senate Democrats who backed a successful Republican-led bankruptcy reform bill that stripped private student loans of bankruptcy protection amid an explosion of private loan debt.

“He is a zealous advocate on behalf of one of his biggest contributors — the financial services industry,” Senator Elizabeth Warren (D-MA) said of Biden at the time.

For his part, Biden argued the law was necessary to prevent abuse of the system by borrowers who could afford to repay some of their debt. He and other supporters of the bankruptcy bill claimed the legislation would enable private lenders to lower costs for people seeking credit. But both arguments were ultimately proven wrong — abuse was minimal, and interest rates in general did not go down. Instead, the law resulted in a system that leaves borrowers with few options for relief.

Prior to the passage of the revised bankruptcy law, student loans issued by for-profit private entities could be erased under the Bankruptcy Code. Congress had stripped federal student debt of bankruptcy protection in the 1970s, but private loans were a different matter. The 2005 law removed those protections, requiring borrowers to show that compelled repayment of their loans would impose “undue hardship” on them or their dependents.

Proving undue hardship is difficult, because the Bankruptcy Code does not define the term. In general, courts have found that it means borrowers are unable to repay their loans and maintain a minimum standard of living. To determine whether that is the case, many courts apply what has come to be known as the Brunner test.

Established in the 1987 case Brunner v. New York State Higher Education Services Corp., the Brunner test involves three requirements to prove undue hardship: the borrower must be unable to maintain a minimal standard of living for themselves and their dependents; the borrower’s financial status must be likely to continue for a substantial part of the repayment period; and the borrower must have made a good-faith effort to repay the loan debt.

Because of the subjective way different courts have applied the test, the requirements have proven to be a notoriously high bar to meet. Prior to the 2005 law, a showing of undue hardship had only been required to discharge federal student loans, which traditionally offered lower interest rates and greater repayment flexibility than private loans. Since private loans had no such cushions, the 2005 law expanding the Brunner test to cover them proved to be punishing.

The change turned out to be so damaging that the Obama administration tried to roll the law back in 2015, while Biden was vice president. Barack Obama’s Department of Education released a report urging legislative action. It read:

As private student loans generally do not include the consumer protections, such as income-driven repayment plans, included in federal loans, the undue hardship standard for bankruptcy discharge leaves private student loan borrowers in financial distress with few options.

Even the Bloomberg editorial board lamented the lack of relief for student borrowers in 2018, calling for changes in an op-ed titled, “Let Student Borrowers Declare Bankruptcy, Already.” The editorial board noted that those who cannot pay their student loans “are relegated to a modern-day form of debtors’ prison.”

Howard University bankruptcy law professor Matthew Bruckner told us that the second prong of the Brunner test — that a person must prove loan repayment would be a burden through much of the repayment period — is particularly difficult for student borrowers to meet.

“The standard repayment term is ten years,” he said. “Some courts have said you could repay them over twenty-five years.”

It’s very hard for people to prove that their financial situation will stay the same for that long, said Bruckner, adding, “I don’t know what I’m going to have for dinner on Sunday.”

A New Standard

A new case that the Supreme Court may consider could upend the Brunner test. A petition for a writ of certiorari, or review by the high court, has been filed in the case of McCoy v. United States, which centers around Texas resident Thelma McCoy.

McCoy pursued higher education in her forties, taking out student loans to do so. However, after severe accidents left her disabled with diminished job prospects, she found herself unable to pay her debt. Now in her sixties, she owes about $350,000.

In 2016, McCoy filed for bankruptcy protections and filed a separate lawsuit against the US Department of Education to discharge her loans. The courts found that McCoy had failed to meet the second prong of the Brunner test.

In support of McCoy’s legal efforts, the nonprofit Center for Responsible Lending has filed an amicus brief with the Supreme Court calling for a rejection of the Brunner test in favor of a less common and more lenient standard, called the “totality of the circumstances” test, which, as the name suggests, weighs real-world circumstances — the debtor’s past, present, and future financial resources; living expenses; and anything else that’s relevant.

If McCoy is successful in her efforts, it could be a boon to overwhelmed student borrowers across the country. The May 7 deadline for the Supreme Court’s response to the petition is fast approaching.

Even if McCoy goes the other way, which is possible with a Supreme Court dominated by conservatives, there may still be hope, thanks to other recent court cases.

In January 2020, the chief judge of the US District Court for the Southern District of New York, Cecelia Morris, canceled more than $221,000 worth of student debt in a decision that could have significant implications for the Brunner test.

Navy veteran Kevin J. Rosenberg had accrued student loan debt more than a decade after completing law school. His debt, which was roughly $116,000 after graduation, reached that amount despite repayment efforts over a thirteen-year period. He filed for Chapter 7 bankruptcy in 2018 and commenced an adversarial lawsuit to have his debt discharged months later under the US Bankruptcy Code.

According to Bruckner at Howard University, Morris’s decision was noteworthy because of how it interpreted the second prong of the Brunner test — that the borrower must prove repayment will continue to be a challenge through much of the repayment period.

“She looks at this [question], ‘Will you be able to pay in the future?’ as asking, ‘Will you be able to pay when the loan is due?’ And she said, ‘Well, the loan has been defaulted and accelerated, so there is no future; the future is now,’” Bruckner explained. “That’s really interesting. I hadn’t seen any other court do that. I’m not aware of any court that interpreted it that way.”

Rosenberg was one of several recent cases in which a court has been willing to discharge student debt in bankruptcy. In August, a federal appeals court allowed a bankruptcy discharge of $200,000 for a Colorado couple with eleven private student loan accounts. The next month, a New York judge enforced a prior discharge of $400,000 of federal student loans.

There is even a new start-up called Reset Button, which seeks to encourage and facilitate student borrowers to attempt discharge of their debt through bankruptcy. The company provides a consultation service for borrowers, drafts a strategy, and connects them with bankruptcy professionals in select states.

“A Little Bit of Hope”

While the courts may present one avenue for student borrowers, advocates are pushing for more action from the federal government.

Earlier this month, the US Department of Education offered up minimal relief, announcing that roughly 72,000 student borrowers who were defrauded by their schools would get loan forgiveness totaling $1 billion. The amount represented a mere 0.058 percent of total student debt and 0.16 percent of total borrowers.

If the president so desired, he could back legislation to statutorily change the “undue hardship” standard, rather than waiting for a judicial reinterpretation of current law. He could go even further by issuing an executive order to cancel most or all student debt on federal loans. Last week, Senate majority leader Chuck Schumer took the remarkable step of calling on Americans to make phone calls to the president to demand he cancel $50,000 of student debt per person.

“We’re asking you, email, call, write President Joseph Robinette Biden, and tell him you want this done,” Schumer said.

Now, according to the latest reports, Biden is exploring canceling $50,000 worth of student debt per person, and is considering capping or eliminating interest payments.

In New York, Jessica noted the gesture would hardly “make a dent” in her $200,000 debt. But between that and the recent developments in the courts, she finally feels there could be an eventual escape from the burden of her student loans.

“Now,” she said, “I have a little bit of hope.”