Part I — History
Part II — Economics
Part III — Bankruptcy
Part IV — The Road Ahead
Let’s first begin with a history of facts.
This will give us a clearer lens to peer through as we begin to understand where this ship has been, where it is now, and where it could likely sail to in the coming years.
Student loans were first offered to Harvard students in 1840 to attend the university.
In 1867 the Department of Education was formed to increase the effectiveness of schools, but did not formally have a student loan program in place.
By 1944 the GI Bill was passed to allow WWII Veterans to attend college for very cheap, or even for free.
1958 Federal Student Loans are first offered in an effort to improve schools and encourage postsecondary education, mainly as an effort to compete with the Soviet Union.
1965 The Higher Education Act is passed, establishing the Federal Family Education Loan Program (FFELP), thus allowing banks and private institutions to provide loans to students.
1966 A committee is formed to monitor financial aid throughout the United States.
1972 the Equal Opportunity Grant is formed, which would later become the Pell Grant.
1992 Direct lending is established and the FAFSA is created through the Higher Education Amendments of 1992.
1993 Direct lending to students by the Gov is implemented through the Student Reform Act.
2005 Direct loans rated are reduced from 4% to 1%, and graduate students can borrow PLUS Loans through the Higher Education Reconciliation Act.
2008 Credit market problems force private lenders to pull out of FFELP programs.
2010 Legislation eliminated the FFELP and mandates all loans be Direct Loans, and Private Student Loans begin being offered directly from non-Gov entities.
2012 Student loan debt surpasses $1 Trillion
A Breif History of College Tuition
In 1796 Thomas Jefferson proposed an education system that would be supported by taxes.
At the turn of the 19th Century many “colleges” did not charge tuition, and if they did it was very low fees (even when made comparable to todays dollar).
By 1810 colleges provided a minimal amount of supportive services, a simple way to understand this would be to consider turn of the century military installation settings (barrack style arrangements and less than outstanding food).
By the 1870’s one could attend Harvard for $150 a year (about $3,000 in todays dollar), or chose the less prestigious Brown University for $75 a year.
The spike in tuition during the 1920’s is most correlated with the surge in admissions; it is believed that by the end of the decade 20% of American’s would be enrolled.
By the 1970’s Private colleges cost about $10k per year to attend, while state schools adverage about $2.1k.
Prior to the 1970’s college tuition rates increased about 2%-3% annually, which was following an appropriate path with the surrounding economies growth. However, by 1975 college tuition begins to surge, with rates increasing twice that of economic inflation. For example, in 2003 college tuition increased by 14% from the previous year.
In 1987 private schools saw a 52% increase, and public schools saw a 44% increase, both over a 5 year span.
Throughout the 1990’s the debt associated with tuition begins to burden borrowers.
Between 2006 and 2007 college tuition increases 6%, with a private college averaging just over $25k annually and public colleges averaging about $3.5k annually.
In 2007, George Washington University becomes the first school to charge more the $50,000 for annual tuition.
In 2011, for the first time, colleges bring in more money through tuition than they receive in state funding.
Academic years 2011–2012 students paid, on average, $119,400 for private education and $33,300 for a public education.
Both private and public colleges had a 3.4% increase in the 2016–2017 academic years, from the previous years, respectively.
Conservative projections suggest that students can expect to pay an average of $340,800 for a private education and $95,000 for a public education by 2028.
It wasn’t until 1958, after the implementation of the National Defense Education Act that student loans began showing up as a considering factor in the daily lives of many Americas.
By 1979 student loans had worked their way into the mainstream economic canvass that laws were passed specifically addressing their role as a consumer debt in Federal Bankruptcy Courts.
By 1997 the burden of college debt began delaying marriages, individuals having children, and major life decisions.
2005 was the tipping point in which student loan borrows begin defaulting beyond market expectations.
The following information is based on findings from a study regarding 4-year institutions (Bachelors degrees).
- 32% of first-time, full-time undergraduates complete their degrees in 6 years with open admissions policies
- 88% of first-time, full-time undergraduate students complete their degrees in 6 years with admissions acceptance at about 25%
- 59% of first-time, full-time students complete their degree within 6 years at the same university they started at.
Drop Out Rates
- 60% of college drop outs had no support from family in paying for college
- 50% of college drop outs have an income less than $35,000 annually
- 70% of Americans will attend a four-year institution, but on 2/3 will graduate.
- Males are more likely to drop out of college than females
2017 Student Loans Stats
$1.4 Trillion in outstanding student loan debt.
Over 44 million Americans with student loan debt.
Student loan delinquency rate 11.2% (90+ days delinquent or in default).
On average, 3,000 Americans default on their loans each day.
Student loan debt is greater than the total U.S. credit card debt.
Prison vs. College
In California, it now cost $75,560 to house an inmate per year…that is more than it costs to send them to Harvard University for a year.
Ripple effects of student loan debt
- stifles spending
- slows housing market
- holds back new businesses
United States Department of Education
Is the ONLY lending company that makes a PROFIT on defaulted loans:
- Estimates, on average, about $50 Billion in profit from student loans
Bankruptcy for an individual generally consists of secured and unsecured consumer debt.
Without attempting to explain bankruptcy law (which is overly intensive), some basics need to be explored to better understand the relationship bwteen bankruptcy and student loans.
Secured debt is money borrowed that is guaranteed (or secured) by the borrower’s funds or assets and held by the lender in an interest-bearing account.
A defining characteristic of an unsecured debt is that it does not require collateral to secure the loan. (Collateral is an asset that the lender can take if the borrower defaults on the loan.) This means there is a higher risk of default for the lender, and that is why unsecured debt generally carries a higher interest rate than secured debt.
The most typical assets used as collateral are homes and cars. With a mortgage, home equity loan, home equity line of credit, or refinancing, the home is used to secure the debt. If the borrower defaults on the mortgage, the lender takes possession of the home through foreclosure. Similarly, the car is used as collateral for a car loan. Also, certain secured credit cards use money deposited by the borrower as collateral.
Interest rates reflect the risk to the lender. With a secured debt, there is less risk since the lender has a way to recoup some of the money it has lent out, and the borrower has so much to lose if s/he defaults. For example, the borrower can lose his/her home if the mortgage is not repaid, or the car can be taken if the car payments are not made. In addition to the damage that would be done to the credit scores, these are dire consequences. For this reason, secured debts are considered a better risk for the lender so the lender can afford to offer the borrower a lower interest rate. Because an unsecured debt does not require any collateral, the interest rates are much higher for this type of loan.
Prior to 1976 student loans were dischargeable in bankruptcy without any contraints.
The rational behind the 1976 change was that Congress had been lobbied to believe that students would flock to Bankruptcy courts soon after completing their studies, and cripple the US economy. However, as of 1977 only 0.3% of students loans had been granted discharge through bankruptcy.
When the US Bankruptcy Code was enacted in 1978, the ability to discharge student loans was narrowed. At this time you would need to be in repayment for a minimum of 5 years before your loans could be bankrupted.
Up until 1984, only private student loans made by a nonprofit institution of higher education were excepted from discharge
The enactment of the Bankruptcy Amendments and Federal Judgeship Act of 1984, private loans from all nonprofit lenders were excepted from discharge.
In 1990, the period of repayment before a discharge could be received was lengthened to 7 years.
In 1991, the Emergency Unemployment Compensation Act of 1991 allowed the federal government to garnish up to 10% of disposable pay of defaulted borrowers.
In 1993, the Higher Education Amendments of 1992 added income contingent repayment which required payments of 20% of discretionary income to be paid towards Direct Loans. Which meant that after 25 years of repayment the remaining balance was forgiven.
In 1996 the Debt Collection Improvement Act of 1996 allowed Social Security benefit payments to be offset to repay defaulted federal education loans.
In 1998, the Higher Education Amendments of 1998 struck the provision allowing education loans to be discharged after 7 years in repayment.
In 2001, the US Department of Education began offsetting up to 15% of social security disability and retirement benefits to repay defaulted federal education loans.
In 2007 the College Cost Reduction and Access Act of 2007 added income based repayment which allows for a smaller repayment than income contingent repayment, 15% of discretionary income and debt forgiveness after 25 years.
In 2010, the Health Care and Education Reconciliation Act of 2010 created a new version of income-based repayment cutting the monthly payment to 10% of discretionary income with debt forgiveness after 20 years.
The Not So Secret Loophole
11 U.S.C. § 523 (a)(8)
Under this section of the Bankruptcy Code Student Loans can be discharged in a bankruptcy upon showing “undue hardship”.
The problem, is that neither Congress nor the Judiciary have clarly defined “undue hardship”, and thus have left it to judicial gloss and interpretation.
When Congress created the undue hardships code for discharging student loans in bankruptcy there was no uncertainty about what it meant to make payments on a student loan, and throughout the past 3 decades Congress has continued to update and provide development with respect to the bankruptcy codes, all the while having full peripheral knowledge of the development of various income-driven repayment plans, Congress has not changed the original 1978 language of the dischargeability of student loans for undue hardship under 523(a)(8).
We can safely believe that Congress did not foresee or intend that the development of income-driven repayment plan to be considered as a factor in determining “undue hardship”. Brondson, 435 B.R. at 801. The Brondson court recognized, as have all other courts, that participation in a long-term payment plan is not mandatory and a borrower should not be denied an undue hardship discharge based solely because he is not persistently enrolled in a plan or did not enroll in one in the past.
In the last quarter-century, education costs and student loan debt have increased exponentially. According to the Bureau of Labor Statistics, between 1980 and 2010, the cost of college increased at a rate approximately five times the rate of inflation. While the current Bankruptcy Code allows discharge of student loans upon showing “undue hardship”, Congress has, in some regards, continually failed to provide clear definition of the term “undue hardship”, with regards to it’s use within § 523, thus leaving the entire judiciary system susceptible to constant evolving, and sometimes conflicting interpretations of how “undue hardship” should be measured.
 Tim Fernholz, “Why It’s So Hard to Stop College Cost Inflation in the U.S.,” Quartz (Aug. 2013), available at http://qz.com/103658/why-its-so-hard-to-stop-college-cost-inflation-in-the-us/#103658/why-its-so-hard-to-stop-college-cost-inflation-in-the-us/.
The fact of the matter is that Congress has continually evolved the laws surrounding the governance of student loans in bankruptcy over the past three decades, Congress uses the term of “undue hardship” across other bankruptcy code sections that deal with the reaffirmation and dischargability of consumer debt, and have provided a presumption to guide bankruptcy courts in applying the undue hardship standard (aside from any measure used that is not found within the legal language). See 11 U.S.C. § 524(m)(1):
…it shall be presumed that such an agreement is an undue hardship on the debtor if the debtor’s monthly income less the debtor’s monthly expenses as shown on the debtor’s completed and signed statement in support of such agreement required under subsection (k)(6)(A) is less than the scheduled payments on the reaffirmation debt.
This test created by the presumption appears to look solely at the debtor’s income and expenses in relation to the repayment requirements with regards to undue hardship.
The Tenth Circuit observed “the phrase ‘undue hardship’ was lifted verbatim from the draft bill proposed by the Commission on the Bankruptcy Laws of the United States.” ECME v. Polleys, 356 F.3d 1302, 1306 (10th Cir. 2004). The Commission Report describes “undue hardship”, as follows (Report of the Comm’n on the Bankr. H.R. Doc. №93–137, Pt. II § 4–506 (1973):
In order to determine whether nondischargeability of the debt will impose an “undue hardship” on the debtor, the rate and amount of his future resources should be estimated reasonably in terms of ability to obtain, retain, and continue employment and the rate of pay that can be expected. Any unearned income or other wealth which the debtor can be expected to receive should also be taken into account. The total amount of income, its reliability, and the periodicity of its receipt should be adequate to maintain the debtor and his dependents, at a minimal standard of living within their management capability, as well as to pay the education debt.
However, even with regards to presumptively clear directives to appropriate the measuring of the standard of “undue hardship”, interpretational gloss has lacked both consistency and certainty in determining what truly constitutes as an undue hardship for a debtor in a bankruptcy case involving student loans.
Sadly, many debtors have been forced to prove that their life has to be “totally incapacitated” or that they have a “certainty of hopelessness” in order to discharge their student loans in bankruptcy.
Current measurements for “Undue Hardship”
The Brunner Test, is adopted by nearly all Bankruptcy Circuit Court across the USA. The meat of this test:
- Based upon your current income and expenses, you cannot maintain a minimal standard of living for yourself and your dependents if you are forced to repay your loans.
- Your current financial situation is likely to continue for a big part of the repayment period.
- You have made a good faith effort to repay your student loans.
The Totality of Circumstances Test, which has been adopted by the 1st Circuit and narrowly adopted by the 9th Circuit.
With regards to an attempt at uniformity, the majority of circuit courts have adopted the Brunner Test to evaluate “undue hardship”, named after the 1987 case. While significant changes to student loan borrowing, specifically with relation to the weighty increased costs of attending, have long evolved the behaviors of modern borrowers since the adoption of the Brunner Test standard, the recent changes to § 523 and student loan programs have long rendered the Brunner Test obsolete, and compel consideration of a new approach.
The callousness of the Brunner Test can be understood simply as a relic of its times based on both the Judiciary and Congress’s theory that student loan borrowers would abuse the bankruptcy system by submitting impetuous filings. Although, the judiciary assumed the interpretation without Congressional directive and added “good faith” to the Brunner Test, despite the lack of any contextual basis for it in § 523. See (In re Brunner, 46 B.R. 752, 755 (S.D N.Y. 1985), the “good-faith” requirement carries out the intent of § 523(a)(8) to “forestall students…from abusing the bankruptcy system”.
An empirical study has recently been published that identifies current statistical demographic characteristics about the average debtor that seeks discharge of student loans through bankruptcy, which clearly debunks the validity of this Congressional and Judiciary theoretical concern of the 1970’s, and that those same concerns lack both the relevancy and validity in todays student loan borrowing arena as well.
In fact, there is no statistical data, or scientifically evaluated evidence that would even suggest that, or point out trends that identify student loan borrowers as abusing the bankruptcy system. On the contrary, we see the majority of student loan borrows that file for bankruptcy not even attempt to discharge their student loans in their bankruptcy cases.
While Congress, presumably, has been ineffectual in modifying necessary changes to the bankruptcy codes in recent years, two recent bankruptcy cases indicate that the judiciary might, in incremental fashion, be reintroducing a debtor’s ability to discharge student loans without forcing debtors to live up to the historical unreasonable interpretations and expectations of the Brunner Test. Specifically, in 2013, the Seventh Circuit and Ninth Circuit Bankruptcy Appellate Panel (BAP) issued decisions that were critical of Brunner in Krieger v. Educational Credit Management Corp. and Roth v. Educational Credit Management Corp. (In re Roth), respectively. Krieger and Roth have further supported a decade long circuit split on the Brunner majority.
The assault on the Brunner supremacy began in 2003, when the Eighth Circuit decided Long v. Educational Credit Management Corp. (In re Long). Instead of forcing the debtor to climb the Brunner mountain, the Long court provided a more lenient path, analyzing the totality of the circumstances, including (1) the debtor’s past, present and likely future financial circumstances; (2) his/her reasonably necessary living expenses; and (3) any other relevant facts and circumstances.
The overarching purpose of the Bankruptcy Code is to provide a “fresh start” for the honest-but-unfortunate debtor.
 In re Brunner, 46 B.R.752, 756 (S.D.N.Y. 1985), aff’d, Brunner v. New York Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987).
 Iuliano, Jason, “An Emperical Assessment of Student Loan Discharges and the Undue
Hardship Standard,” 86 American Bankruptcy Law Journal 495 (2012).
 Krieger v. Educ. Credit Mgmt. Corp., 713 F.3d 882 (7th Cir. 2013); Roth v. Educ. Credit Mgmt. Corp. (In re Roth), 490 B.R. 908 (B.A.P. 9th Cir. 2013).
 Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549 (8th Cir. 2003).
 Wetmore v. Markoe, 196 U.S. 68, 77 (1904).
The Student Loan bubble is going to pop… or has it already?