The extreme restrictions imposed on student loan borrowers trying to discharge their student debt in bankruptcy may be reviewed by the United States Supreme Court.
By way of background, the whole concept of “bankruptcy” was created as the ultimate safety net for consumers in a market economy. The idea is that sometimes bad things happen to people, mistakes are made, or consumers get in over their heads; regardless, people deserve a fresh start and a second chance to succeed in our society.
Unfortunately, over the course of the past two decades federal legislation has made it increasingly difficult for consumers to discharge their student loans in bankruptcy. Congress carved out a special standard for student loans, requiring that student loan borrowers prove that an “undue hardship” prevents them from paying off their student loans in order for a bankruptcy discharge to be granted. This standard was never really defined in legislation, but judges interpreted this phrase to make it extraordinarily difficult for borrowers to prevail. In the meantime, student loan debt and higher education costs increased at nearly exponential rates.
It is in this context that individual bankruptcy judges have begun to buck the trend of harsh bankruptcy rulings against student loan borrowers, recognizing the vast disconnect that now exists between the “undue hardship” standard as defined by judges in previous decisions, and the current student loan environment.
And now, the issue may be decided by the United States Supreme Court. A 57-year-old student borrower who has been unable to meet the “undue hardship” standard in lower courts has appealed his case to the U.S. Supreme Court for review. While the Court has not yet agreed to take the case, I think there are three reasons it may do so:
- Different federal appeal circuits are using different tests to decide whether or not a borrower meets the “undue hardship” standard for a discharge of student loans in bankruptcy. When different parts of the country are treating what is supposed to be a uniform national standard in different ways, the Court may be more inclined to weigh in.
- Conservative justices on the Supreme Court may want to hear the case. Because “undue hardship” was never really defined in the original federal bankruptcy reform legislation, judges have had to interpret the standard themselves. Conservative justices who are strict constructionists (meaning they tend to take a more literal approach to federal law) may want to take a look at what has happened with the “undue hardship” standard, because they tend to not like it when judges effectively write the law themselves due to statutory ambiguity.
- Liberal justices on the bench may also want to hear the case. The bankruptcy reform law that created the “undue hardship” standard for student loans, and the subsequent case law that interpreted it, originated during a time when student loan debt was far more manageable on an individual and societal scale than it is today. Liberal justices may see this as an opportunity to strike down outdated standards that were never really intended to apply to today’s student debt crisis.
Ultimately, we’ll have to see whether the Court takes the case, and there’s no way to predict how this may come out if it does. But there’s a chance that the Supreme Court could accomplish what the rest of our government has so far been unable to do: achieve widespread student loan reform that could impact the lives and expand the rights of every single student loan borrower in the country. We’ll see.