In the somewhat more liberal Eighth Circuit, Bankruptcy Judge Thad J. Collins discharged $230,000 in student loans owed by a woman with advanced degrees who had been unable to win gainful employment for the last 10 years in rural South Dakota.
Now 50 years of age, the debtor earned her bachelor’s degree, J.D. and master’s of public administration from the University of South Dakota between 1989 and 1993. For three years after her admission to the bar, she held a job as a lawyer with a nonprofit organization until budget cuts ended her employment. She was unemployed for the next five years, followed by eight years of employment in a non-legal job. After that job ended, she had been unemployed for the last 10 years.
Bankruptcy Judge Collins held a trial and found that she had applied for hundreds of jobs, had been called for a few interviews, but had received no offers. He said she consistently made payments on her student loans when she was employed and sought deferments when she was unemployed.
She and her husband are supporting their two college-aged children. Her 66-year-old husband, the sole source of the family’s income, makes about $39,000 a year. The lender conceded that the family’s expenses were reasonable. Modest monthly expenses exceeded income by almost $200, Judge Collins found.
The original principal balance of the loans was about $48,000 but had grown to $230,000 with interest at 9%. Over the years, she had paid more than $30,000 toward the student loans, but only $4,000 was applied to the principal while the remaining $26,000 was for interest.
If the debtor were to land a job, Judge Collins found that the loan balance would continue growing because whatever she could pay would be less than newly accruing interest.
Unlike the Ninth Circuit Bankruptcy Appellate Panel, which permits partial discharge of student loans under Section 528(a)(8), Judge Collins said in his Feb. 16 opinion that the Eighth Circuit BAP prohibits the practice. Although the lender conceded that the debtor was entitled to discharge all but $90,000 of the loans, Judge Collins said it was an all-or-nothing proposition in the Eighth Circuit.
On the standard for discharging student loans, Judge Collins said that the Eighth Circuit has adopted the more liberal “totality of the circumstances” test as opposed to the so-called Brunner test.
Applying Eighth Circuit rules, Judge Collins concluded that the debtor was entitled to discharge all of the student loans, in large part because her inability to land a job was “not for a lack of trying.”
Another factor weighing heavily in her favor was her husband’s age. At age 66, he may be unable to work much longer, at which time the debtor would become the family’s only wage-earner and could not afford to divert income to paying student loans.
The lender argued that the debtor was not entitled to discharge the loans because she would qualify for an income-based repayment program, or IBRP, where she would owe nothing unless her income were to rise. In 20 or 25 years, whatever is left on the loans would be forgiven, but the forgiveness could be taxable income.
In 20 or 25 years, the debtor would be 70 or 75 years old, and whatever savings she amassed would be consumed by the maturing tax liability. In other words, Judge Collins said, the “tax liability could wipe out all of debtor’s assets not as she is approaching retirement, but as she is in the midst of it.”
Judge Collins therefore ruled that an IBRP “does not ameliorate the undue hardship.”
In sum, Judge Collins said that the debtor was entitled to discharge the student loans under Section 523(a)(8) because she had shown undue hardship, made good faith efforts to repay, made payments when she was able, applied for deferments when she was not, and incurred reasonable living expenses.
Update: The lender filed a notice of appeal but later withdrew the appeal.