Why Student Loans Are Void: 20 Years of “Undue Hardship”
Think back to the “Financial Aid Workshop” at your opening week of college. What you probably remember hearing was something like this:
“Student loans cannot be discharged in Bankruptcy.”
Or maybe it is something more dramatic like:
“Be careful. You will have these loans for life. Student debts are not like other forms of debt. You will never be able to get free of these loans through bankruptcy. There are very strict laws about this.”
That kind of talk has been the norm for 20 years. Schools tell you this. The media tells you this. Parents tell you this.
Here is the problem. There is no law that forbids bankrupting student loans. You have been deceived. What is the truth about Student Loans and Bankruptcy?
It was 20 years ago (passed on October 8, 1998) that congress underhandedly altered laws which changed the way bankruptcy dealt with student loans (See if you can get any idea of what those sections of these acts dealing with Student Loan Bankruptcy mean from the text itself!).
The 1998 changes Congress made to student loan law actually made no sense.
The result of the 1998 Higher Education Act Amendments on higher education financing and bankruptcy is not just stupid. It is not just unfair. The truth is that the law is actually nonsense.
Meanwhile, schools and the Department of Education, and lenders have failed to be transparent about the decrepit condition of the law that defines or fails to define bankruptcy procedures for student financing.
October 1998 was an insane moment for student loan law. It was the moment when the law regarding student loans and bankruptcy literally stopped making sense. But we have gone on acting as if there was a law in place that effectively prohibited bankrupting student loans.
Why haven’t we thought more about this?
Obviously, it is because our trusted institutions of higher learning have been telling that the law has a meaning!
Schools and lenders have been telling students and parents for twenty years that there is no bankruptcy for student loans. Unfortunately, that is just not what the law says. What does the law say? Really, it says nothing at all. The law on student loans and bankruptcy fails to make sense. The contracts that have been made under these conditions need, therefore, to be voided.
To understand how and why the law fails to make sense, though, you actually have to think about what the law says. Thinking hard about a law is not easy. But it is worth it. It is a scandal that more people have not done it. Really, people’s reluctance to look past what schools say the law means is evidence of just how powerful our institutions of higher education have been and still are.
We need analogies to understand this law.
Here are three analogies that can help us to understand how irreparably flawed the language of student loan bankruptcy law has been since 1998.
First Analogy: The Water On a Hike Analogy
Imagine that we are on a hike. You don’t have any water with you. But, I do have some. Maybe you’ll grab some from somewhere or someone on the way. We are not sure. First, I tell you,
“Hey, we have to conserve water. Once we have hiked for five hours I can give you some for sure. But until then unless you get really, really thirsty I am not going to give you any until then.
You think to yourself, “That kind of sucks.” But, you say, “Fine.”
A little later, I tell you, “Let’s make it 7 hours now until we stop for water. Unless, you get really, really thirsty then you can have some.”
“Ugh, Fine.” You say.
Then a little while later, I say: Actually, I just realized I can never give you any water. That is, unless you get really, really thirsty.”
It does not make any sense. Of course, after 5 or 7 hours if I have not gotten water from anywhere else, I am going to be really, really thirsty!
But this is basically what happened to student loan bankruptcy law in 1998.
Leading up to October 1998, Student Loan Bankruptcy law was like this: You have to wait a certain number of years to discharge student loans through bankruptcy.
UNLESS you experience Undue Hardship before that, then you can discharge your loans before the time limit is reached.
(The limit had been extended from 5 years in 1992 and the 5 year time limit dates to the early 1970s.)
In October 1998, however, Congress took the idea of “Undue Hardship” and put it somewhere that it did not belong. Congress moved the concept to a place in the legal code where it no longer made any sense.
Thus, Undue Hardship went from being an exception to an exception to an exception (No student loan bankruptcy unless you wait 7 years unless you can show Undue Hardship) and it was made into a rule in and of itself.
Originally, the concept of Undue Hardship was used to add rights.
If needed after 7 (initially 5) years, bankruptcy of student loans is allowed. Plus “Undue Hardship” gives you the right to discharge before 7 years.
But then it 1998 it became: Bankruptcy is prohibited except in “Undue Hardship.” But what is Undue Hardship? Well, it was never really defined. There are other examples where the term is used in law that I examine in another post.
But think of “Undue Hardship” in the same way as “Really, really thirsty” in the hike analogy. In the first statement, it was presumed that if you made it 7 miles, you would probably be really, really thirsty already. Maybe someone who did not find any other water could get really, really thirsty before 7 miles. Hence, the right is provided for: Go ahead and ask me for water before 7 miles if you are really, really thirsty.
In both the Water on a Hike analogy and for student loan bankruptcy, taking away the time frame of reference makes the ideas of really, really thirsty and of “Undue Hardship,” respectively, vague and incoherent.
Ok, you may say: “Well Congress makes mistakes. There are lots of laws that do not make any sense. You can’t do anything about it now.”
The big problem, however, is not merely that Congress made a stupid law, an unfair law, an evil law, etc.
The real problem is how schools and lenders willfully and habitually misrepresented the state of the law to their customers.
Beginning in 1998, Financial Aid offices and advocates for lenders sold a myth to their students, parents, and the general public. That myth was that judges were bound to interpret the judgment of “Undue Hardship” even more strictly than ever. This was simply not true.
The common idea about this is that there are a variety of very difficult legal “tests” available to judges to determine if applies to someone trying to bankrupt student loans. But these test were all created before the time limit was removed — utterly changing the meaning of “Undue Hardship.”
Empirical studies of bankruptcy court decisions since 1998 do not even support the idea that judges have been strict, in practice. (See most notably Rafael I. Pardo & Michelle R. Lacey, Undue Hardship in the Bankruptcy Courts: An Empirical Assessment of the Discharge of Educational Debt from 2005)
The main point is: The law is truly incoherent. Not just unfair. The law on Student Loans in Bankruptcy has been virtually nonsense for twenty years. But meanwhile, so-called “Financial Aid” officers have been misrepresenting the law to students as a prohibition on student loan bankruptcy. This misrepresentation has served to legitimize financial practices that could not have continued without reform for two decades.
Here is another analogy to think about the changes to Student Loan Bankruptcy which were passed into law twenty years ago in October 1998.
2. The Baseball Analogy
So the Water on a Hike analogy, may seem rather absurd and dire.
But we can also compare the 1998 changes to a more banal situation:
Imagine that I am a big baseball fan. But I know I am going to have a super busy summer at work. I’m worried that baseball could be a distraction. So my wife suggests only checking baseball coverage on the weekends unless, there is some really special news that I really to hear about. I say, “That sucks. But ok.” And it works out all right. I do get a lot of work done as the regular season goes by and I only read coverage during the week when some really special news comes out.
The summer goes by and the playoffs come along. That’s when I say to my wife, “I wonder if I am going to end up binging on baseball coverage during the playoffs.”
Then my wife says, “I think that unless you hear about some really special news happening, you should not read or watch videos about baseball during the playoffs.”
That is absurd. It sounds like a line from a network sitcom from some time in 1990s. The playoffs and world series are implicitly Big News.
But this is almost point for point parallel to the way that Congress rewrote the laws on bankruptcy in relation to educational financing in 1998. “Undue Hardship” originated as an exception that added rights (via a judge’s discretion) within a finite limit, just like “if there’s really really big news” added rights to check baseball coverage when I was otherwise trying to focus on work during the week until the playoffs.
Then Congress put the term where it did not belong, in a rule that did not make sense. Financial Aid departments and profit-seeking lenders started encouraging the impression that bankruptcy courts were taking away the rights for a life time.
There is a pretty clear consensus among authors who write on why the student loan bankruptcy time limit was repealed in 1998: It was due to the influence of lobbyists from the student loan industry, primarily the for-profit monopoly corporation Sallie Mae (privatized in 1997). How could lawmakers allow this to happen? Well, the fact is that you can read the 1998 legislation and not see anything about student loans or “Undue Hardship.” The 1998 Higher Education Act Amendment merely moved around uncited pieces of text from Bankruptcy regulations. It was Cut and Paste legislation that concealed the final version of the law being created. And these pieces were added only in September 1998 with little or no discussion on the floor.
Prior to October 1998, “Undue Hardship” added rights to a clear time-defined rule. But due to “Cut and Paste” legislating under the pressure of the Tuition Finance Industry Lobby, Undue Hardship suddenly was being used to define the boundary of a prohibition. But the boundary did not really have any sensible meaning. The logical residue of the time limits in the idea of “Undue Hardship” was left as a glaring blindspot in education financing.
Did schools make a point to spend any time discussing this legal conundrum with their customers/students? No. In fact, they did the opposite.
Conveniently, schools advanced the myth that the law had taken away Bankruptcy rights for student loan debtors. But the fact is that having poorly defined rights is different from having no rights at all. Schools and lenders have been deceptive in representing the law as a prohibition on bankruptcy. This behavior has been truly reprehensible — just as reprehensible, really, as predatory lending practices and other willful distortions on pricing education .
What should schools have been doing instead? Well… how about educating students about their rights? Schools could have been educating students about the fact that bankruptcy law on student loans had been twisted by the Congress of 1998 into a criminally unsound financial structure. Was this mere negligence on the part of lenders, FInancial Aid departments, and the U.S Department of Education? Was it culpable negligence? Or should it be viewed as full-fledged fraud?
We need to find a way to bring this question to courts to decide in the near future.
The twentieth anniversary of 1998 is as good an opportunity as any to start organizing around the call to review the way that the concept of “Undue Hardship” has been misrepresented or even concealed from so many students since 1998.
Before I conclude though, I ask you to consider a more serious analogy than a summer of baseball fandom or even temporary dehydration on a long hike.
3. The Withheld Medicine Analogy
Imagine a serious disease. This disease needs to be treated within the first few months, or the consequences can be grave. The disease is occasionally fatal. Or it may lead to a lifetime of disability. However, treatment is expensive. Occasionally, symptoms are clear in the first few days. But they are not always definitive.
A rule is instituted at the federal level: If symptoms persist for longer than 3 weeks, a treatment must be administered. However, if the doctor feels it is very likely that the patient is infected, the doctor can prescribe treatment earlier.
(Obviously, treatment corresponds to bankruptcy rights in this analogy.)
Then, a change in policy is made (perhaps due to incompetence at the FDA even as instances of the disease are on the rise). Now, health care providers are told they should only administer treatment ONLY if the doctor feels it is very likely that the patient is infected.
Now it is one thing to say such a change could be unfair, harmful, and dangerous in the grand scheme of things. It seems such a change would very likely be harmful. But, it is another thing to show that that such a change is legally flawed, illogical, and vacuous. At the same time, the persistence of symptoms for longer than 3 weeks is obviously still going to continue to play a role in judging it is very likely that the patient is infected and needs treatment.
Wouldn’t the same go for student loans? If Undue Hardship only had a meaning relative to the limit to begin with, simply removing the time limit from law does not eliminate the concern of time since graduation.
Really the analogy only maps clearly onto the situation of student loans if we extend the analogy further.
Just imagine that some health care providers — interested in cutting down on their costs of providing equipment and medicine to all of those who need it — begin distributing pamphlets to their clients and giving informational “seminars” declaring that the FDA has “made it impossible to get treatment for this disease.” As a result, people fail to discuss the symptoms with their doctors and the disease spreads to epidemic proportions.
Will not these health care providers be held liable for the consequences of misrepresenting the law in that case?
The point is that advising your customers that the debt they are taking on can never be discharged in bankruptcy is a lot different from explaining to students the truth that Congress had made rules which make no sense. Schools exist to teach and explain, after all. But in proffering their own financial arrangements, administrators at colleges and universities from the likes Harvard and Yale to those of Devry and ITT have put quite a bit of effort into concealing the legal facts.
Were “Financial Aid” offices just sparing students the trouble of facing a real life conundrum that required parsing complex legal jargon? Maybe. Or was it that “Financial Aid” offices did they not want students to think too hard about the nature of their rights?
Or, maybe, was it a little of both?
The law itself is not merely unfair and unclear. The law is actually totally unintelligible.
It was up to schools to tell the students who have been signing on for tens of thousands (or hundreds of thousands) in debt to attend that the bankruptcy law was incoherent.
Instead, so-called “Financial Aid” offices chose to inform students that “Bankruptcy Rights On Student Loans Did Not Exist.” This is not true. If we want to remedy the disaster that has financed higher education in this country, we have to confront schools. When you look at the way schools represented bankruptcy rights to students and parents, their customers, the only question is this: Fraud or Negligence.
If you are feeling convinced that this law makes no sense (not merely that it is unfair) and that schools have been misrepresenting the legal facts, then you are probably asking:
“What is Undue Hardship supposed to mean anyway!? Where did lawmakers even get the term “Undue Hardship!? Where else is this term even used? In Bankruptcy law? Somewhere else?”
Or, You could just skip to Part 3: Who Really Ought to Go Bankrupt Over Student Loan Law (Hint: It’s Not the Students)
