The History of Student Loan Dischargeability

These days, the non-dischargeability of student loans is a well known fact; many prudent graduates who are burdened with significant student loan debt have at least sought the possibility of filing bankruptcy to relieve student loan debt, only to discover (rather quickly) discharge as a distant pipe dream. Student loans have not always been non-dischargeable, though. Beginning in 1976, Congress began to chip away at 11 U.S.C. 523(a)(8), the discharge exception to student loans, eventually and for all practical matters making student loan debt non-dischargeable by 2005.  

Prior to 1976, student loans were as dischargeable as any other unsecured debt (those not otherwise barred by section 523, e.g., child support payments, alimony, debts incurred through fraud, criminal fines/restitutions). In 1976, an amendment was proposed to limit the dischargeability of student loans, specifically, that student loans issued by the government or by non-profit colleges and universities would only be dischargeable after five years of repayment, unless existence of an "undue burden" could be demonstrated.  The concern was that new graduates would strategically file bankruptcy to discharge their loans before they started working. By 1978, the limit was in effect. A 1979 amendment further limited dischargeability by including government guaranteed loans to the five-year bar, as well as excluding periods of deferment and forbearance from the five-year repayment calculation.

By 1984, further amendments were proposed, indicating a move toward private student loan non-dischargeability. In 1990, Congress changed the five-year bar to seven years.  In 1998, the seven-year bar was removed, prohibiting all government/government-guaranteed student loans, non-profit college and university student loans, and private student loans issued under a "program funded in whole or in part by a governmental unit or nonprofit institution" from discharge.  Finally in 2005, coinciding with the Bankruptcy Abuse Prevention and Consumer Protection Act's sweeping Bankruptcy Code reforms, any loan, including private loans, used for the purposes of student financial aid, were barred from discharge.  Most private student loans made by for-profit institutions by this time would utilize a non-profit organization as the guarantor on the loan. The courts have concluded that these loans are likewise non-dischargeable under section 523(a)(8).

However, since 1978, section 523(a)(8) has included a provision that notwithstanding any other exception to student loan dischargeability, a debtor may discharge her student loans in full if she can establish an "undue burden" with respect to repayment of said loans. While there is no statutory definition for "undue burden" under Title 11, a three-pronged test was laid out in a 1987 decision in Brunner v. New York State Higher Edu. Serv. Corp., 831 F.2d 395, (2d Cir. 1987). The Brunner test states that in order to establish undue hardship, the debtor must prove:

"(1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependants if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans." Brunner at 396. Almost needless to say, undue hardship is difficult to prove, and is rarely accepted. Looking at the legislative history on the ever-contracting section 523(a)(8), it is clear that the enactment of these limitations was in response to a fear that not limiting dischargeability would lead to incessant abuse. Arguably, statistics have been established to show that during the time when student loans were dischargeable, or at least in part, there were no noticeable corresponding indicia of abuse. In the face of skyrocketing tuition and a growing belief that for-profit institutions are fixing their tuition based on adhesionary principles (i.e., the fact they know most students will incur however much debt they need to pay for school), proposals are being raised to amend the Code so as to provide relief to students burdened by signficant debt, especially when job prospects are not where they used to be. Also, considering the aggregate student loan debt will top $1 trillion in the US in 2012 and eclipse aggregate credit card debt (which is dischargeable), some kind of relief ought to be forthcoming.