For nearly 30 years, the judicially created Brunner test has been the predominant standard courts apply to determine whether a debtor’s circumstances constitute undue hardship under § 523(a)(8) of the Bankruptcy Code.[1] In Brunner, the Second Circuit adopted a three-prong test for undue hardship, under which a debtor must show: “(1) that the debtor cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for herself and her dependents 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.”[2] The Eighth Circuit, which applies a ‘totality of the circumstances’ test, and the First Circuit, which has not adopted a standard, are the only two minority jurisdictions.[3]
Regardless of the judicially created standard applied, a debtor who wishes to discharge their student loan debt in bankruptcy faces an uphill battle. This is partially because the student loan exception to discharge in bankruptcy is “self-executing.”[4] Procedurally, a debtor must file an adversary proceeding to challenge the dischargeability of their student loan debt. Assuming the creditor establishes that the contested loan is an educational debt covered by § 523(a)(8), the student debtor carries the burden of proving each element of undue hardship by a preponderance of the evidence.[5]
Rafael I. Pardo and Michelle R. Lacey argue that uncertainty in discharge litigation may adversely affect the fresh start of debtors seeking relief from educational debt.[6] Debtors who most need relief likely cannot afford litigation.[7] A debtor who is able to contest dischargeability is still at a considerable disadvantage against an educational creditor with more resources and little incentive to settle.[8] Undue hardship litigation must be funded post-petition, further impeding an educational debtor’s fresh start.
Many legal scholars have discussed the undue hardship standard, proposed amendments to the Bankruptcy Code and recommended policies to alleviate student loan debt. This article posits that these discussions are often incomplete because they fail to address the effect of § 523(a)(8) and its judicial implementation on aging Americans.
Perhaps surprisingly, Americans between the ages of 60 and 69 experienced the largest percent increase of student loan debt held of any age group over the last five years.[9] This article argues that courts evaluating undue hardship should consider the characteristics of an aging debtor’s student loans in addition to their age. Until Congress revisits § 523(a)(8), aging debtors face strict applications of the undue hardship standard. Student loan debt is a growing problem among older Americans. Additionally, an increasing number of nontraditional students are taking out loans to finance education later in life.[10]
Student borrowers who incur student debt closer to retirement age have less time than traditional students to establish a track record of inability to repay their student loans. Not only do older student borrowers have less time to recover financially before retirement, they are also less able to establish an inability to repay their student loan obligations under Brunner. Modifying how bankruptcy courts consider age under Brunner would better inform senior debtors of the likely outcome of discharge litigation.
Analysis
- Courts Strictly Apply the Undue Hardship Standard, Making It Difficult for Even Financially Desperate Debtors to Escape Student Loans
- A Certainty of Hopelessness: Uncertainty in Litigation
The second element of Brunner, whether “additional circumstances” exist to indicate that the debtor's situation is likely to persist, has been referred to as “the heart of the Brunner test.”[11] According to the Fourth Circuit, this “demanding requirement” is only satisfied when a debtor establishes “exceptional circumstances” that create “a certainty of hopelessness” that the debtor will be able to repay their loans.[12] While the Ninth Circuit similarly expresses the importance of the second prong of Brunner,[13] the court has explicitly held that “additional circumstances” do not need to be “exceptional.”[14]
Not only do courts apply strict tests for undue hardship, different judges apply the same test inconsistently.[15] This combination makes it both difficult for debtors to obtain relief from student loan debt and leads to unpredictable litigation results. Bankruptcy courts also differ in the extent to which they consider age relevant to undue hardship. Some courts weigh age in favor of finding additional circumstances under the second prong of Brunner, while others reason that age alone is not enough.[16]
An empirical study conducted by Rafael I. Pardo and Michelle R. Lacey suggests that undue hardship discharge outcomes are best explained by the inconsistent application of the same standard rather than differences in debtor circumstances.[17] The study compared the demographics, financial characteristics and factual circumstances of debtors who received a discharge with those who were denied a discharge.[18] The average debtor contesting the dischargeability of their student loans was 41 years old.[19] Assuming a 20-year repayment period and a retirement age of 65, the typical debtor may be required to make student loan payments as they approach retirement age when courts deny discharge.[20]
Furthermore, age may be connected to an inability to pay because earning capacity plateaus with age.[21] The authors analyzed age data and found that among full-time workers attempting to prove undue hardship, average earnings were lower among those over the age of 55 relative to workers between the ages of 35 and 54.[22] Nevertheless, the study revealed that the impact of age on determinations of future inability to pay was not statistically significant.[23]
Congress should reevaluate § 523(a)(8) to address these concerns. But in the absence of congressional action, courts should modify how they consider age when analyzing undue hardship.
- Income-Driven Repayment Plans Are Often Not a Viable Alternative to Bankruptcy Relief
Income-driven repayment (IDR) plans allow student borrowers to adjust monthly federal student loan payments based on their income to make payments affordable.[24] IDRs allow a student borrower to pay their federal student loan servicer over 20 or 25 years depending on the plan, at which point any remaining balance is discharged.[25] On the surface, income-driven repayment plans (IDR) seem to offer an administrative solution for financially distraught student borrowers. Nevertheless, the availability of income-driven repayment plans may not preclude the need for relief from federally guaranteed student loans among older borrowers in bankruptcy.
Most courts consider the availability of IDR a factor that is not dispositive in an undue hardship determination.[26] Moreover, courts applying Brunner tend to incorporate the availability of IDR into the third prong of the test: whether the debtor has made a good-faith effort to repay their student loans.[27] Some courts have held that the a debtor’s failure to enroll in a zero-payment IDR plan should not count against finding undue hardship.[28] Conversely, other courts have held that the availability of a zero-payment IDR option weighs in favor of denying discharge, reasoning that student loans subject to a nonpayment IDR do not affect a debtor’s standard of living.[29]
Regardless of the appeal of broad administrative relief, empirical evidence indicates that very few qualifying debtors take advantage of IDR.[30] In fact, the vast majority of borrowers who default on their student loans remain unenrolled in IDR.[31] Problematic implementation and loan-servicing practices create barriers that prevent student borrowers from obtaining relief through IDR.[32]
Older student borrowers report that servicing delays and processing errors limit their ability to take advantage of IDR.[33] Additionally, seniors who enrolled in an IDR while working complain that their monthly payments are not adjusted when they transition to a fixed income.[34] Federal loan servicers have little incentive to inform older individuals of their rights under a plan.[35] Reports also indicate that senior borrowers are sometimes improperly placed on plans suitable for individuals with growing incomes.[36]
In a study of how the availability of IDR affects undue hardship litigation, John Hunt argues that the availability of an IDR plan that would result in negative amortization of student loan debt should not automatically weigh against finding undue hardship.[37] The rationale behind this argument is that an undue hardship litigant should only be punished for failing to enroll in a plan under which their student loan balance would increase if the plan can be justified by a creditor.[38] It is further argued that in undue hardship litigation, educational creditors should have the affirmative burden of demonstrating a material recovery for a plan under which a borrower cannot pay the interest accruing on their student loans to weigh against discharge.[39]
This argument is especially compelling when applied to aging debtors because IDR plans last at least 20 years. For financially distressed aging student debtors, courts should only weigh available IDR plans against finding undue hardship when an educational creditor stands to recover a substantial amount.[40]
- Student Loan Debts Are an Increasing Problem Among the Elderly
The number of older individuals with student loan debt is increasing rapidly. Moreover, the elderly experience problems related to retirement, housing and health care as a result of student loan obligations. Additionally, data gathered from the Consumer Bankruptcy Project (CBP) dataset suggest that a surprising number of seniors in bankruptcy have student loan debt.
- Trends and How Student Loans Affect Seniors
A recent report from the CFPB “makes clear that the education debt crisis and the retirement crisis in this country are very closely linked.”[41] Elder debtors are the fastest-growing age segment of the student loan market, with the number of consumers age 60 or older holding student loan debt quadrupling between 2005 and 2015.[42] Many seniors experience financial difficulties as a result of their student loan obligations.[43]
Student loan obligations hinder senior student borrowers’ ability to pay for necessities. A joint survey conducted by the Association of Young Americans and the AARP revealed that 32 percent of seniors with student loans reported using retirement savings to help pay student loan debts.[44] Additionally, CFPB data suggest that seniors with student loan debt are more likely to skip prescription medicine, doctors’ visits and dental care because they cannot afford it.[45]
When a debtor defaults on a federally guaranteed student loan, their tax refund and some forms of Social Security benefits are subject to garnishment. While Supplemental Social Income (SSI) is protected from garnishment, over 114,000 student borrowers over the age of 50 experienced at least some level of Social Security Disability Income (SSDI) garnishment as a result of their outstanding federal student loans in 2016.[46] Furthermore, the number of student borrowers 65 and older who had their SSDI benefits offset to pay a federal student loan increased from 8,700 to 40,000 between 2005 and 2015.[47]
As the number of aging individuals holding student loan debt has increased, problems associated with student loans have affected many seniors. Additional evidence suggests that these problems extend into bankruptcy.
- CBP: Data Concerning Student Loans in Bankruptcy
I was granted access to the Consumer Bankruptcy Project (CBP) dataset to gather data on elder debtors holding student loan obligations.[48] For the purpose of this study, a joint filing was considered elderly if at least one of the debtors was 65 or older. Additionally, student loans were defined as “the sum of debts listed on Schedule F that were debts owed to a school or state educational authorities or a creditor whose name indicates the debt is a student loan (i.e., “National Student Loan”); or any debt described as ‘educational’ or ‘student loan.’” The 2013-16 CBP dataset consists of 895 debtors for whom age information is available, of whom 120 were 65 or older. Nineteen debtors did not file a Schedule F and were excluded from the calculations.
For the 2013-16 CBP iteration, 9.4 percent of debtors over the age of 65 listed student loan debt on Schedule F. Of those with student loan debt, the average owed was $30,593, with a median figure of $20,977. The percent of senior debtors who list student loan obligations on their Schedule F significantly increased from 3.28 percent in the 2007-2010 CBP iteration.
- With Age, Different Factors Indicate Financial Distress
Courts should consider age and factors associated with how older debtors hold student loans in determining undue hardship. The Survey of Consumer Finance (SCF) collects survey data concerning educational loans at a household level.[49] This includes whether student loans were incurred on behalf of a child and provides insight into how educational debt affects older families.[50] About two-thirds of student debt held by older households was used to finance higher education for the older individual or their spouse.[51]
Rather than simply considering age, courts should analyze characteristics of student loan debt. For example, courts should consider how long a debtor has been repaying their student loan debt. SCF data suggest that the increase in student debt held by older families is partially caused by failure to pay loans that have been held for years.[52] The financial well-being of older households may be strained when debt is still being repaid many years after leaving school.[53] Courts should place an emphasis on the age of student debt and how much principal of the loan has been paid down, because these factors indicate the extent to which a student debtor has experienced a long-standing inability to repay.
Even when loans were taken out relatively recently, courts should evaluate whether educational debt was accompanied by an increase in income. Courts are especially strict in considering whether age contributes to an undue hardship for nontraditional students. Even when a nontraditional student has not incurred new student loans in decades, courts typically conclude that age does not weigh in favor of finding undue hardship.[54] Many courts dismiss payment of educational debts until an advanced age as “merely a consequence” of a nontraditional student’s decision to take out student loans later in life.[55]
The amount of educational debt held by older households has consistently increased, in part because families take out new loans.[56] Of the debt incurred to pay for an older individual’s school, 40 percent was taken out to pay for a program attended within the last five years.[57] This indicates that older households are financing human capital investments well outside of traditional school-going ages.[58] The number of older individuals enrolled in higher education continues to increase.[59] This number is on track to continue to grow through 2023.[60]
Courts reason that additional circumstances under the second prong of Brunner must be outside of the debtor’s control. It is becoming increasingly common for aging individuals’ skillsets to become obsolete.[61] Many older students return to school to improve their employment opportunities.[62] Additionally, aging individuals often face competition to keep their jobs.[63] For some companies, hiring younger talent is a cheaper alternative to retaining older workers.[64] In short, while attending school at an older age is a choice, it is a choice that is often motivated by a desire to keep a current job or remain competitive in today’s technology-driven economy.[65] When additional education is not accompanied by an increase in income, courts should not hold going back to school against vulnerable aging debtors.
Conclusion
The continued increase of student loan debt among the elderly highlights a need for courts to update how they consider age in relation to undue hardship. Not only do older students have less time to recover, student loan debt may adversely impact retirement savings. Courts should only weigh failure to enroll in IDR plans that would have led to substantial recovery against a senior debtor. Courts also should focus on characteristics that indicate financial distress among the elderly; nontraditional students may incur student debt later in life as a result of economic pressure in a rapidly changing job market.
[1]11 U.S.C. § 523(a)(8); Brunner v. New York State Higher Educ. Services Corp., 831 F.2d 395 (2d Cir. 1987).
[2] Brunner, 831 F.2d at 396.
[3] Jason Iuliano, “An Empirical Assessment of Student Loan Discharges and the Undue Hardship Standard,” 86 Am. Bankr. L.J. 495, 497 (2012).
[4] Tenn. Student Assistance Corp. v. Hood, 541 U.S. 440, 450 (2004).
[5] Aaron N. Taylor & Daniel J. Sheffner, “Oh, What A Relief It (Sometimes) Is: An Analysis of Chapter 7 Bankruptcy Petitions to Discharge Student Loans,” 27 Stan. L. & Policy Rev. 295, 309 (2016).
[6] Rafael I. Pardo & Michelle R. Lacey, “The Real Student-Loan Scandal: Undue Hardship Discharge Litigation,” 83 Am. Bankr. L.J. 179, 191.
[7] Id.
[8] Id. at 192.
[9] Zack Friedman, “Student Loan Debt Statistics in 2018: A $1.5 Trillion Crisis,” Forbes, Jun. 13, 2018, https://www.forbes.com/sites/zackfriedman/2018/06/13/student-loan-debt-….
[10] William J. Hussar & Tabitha M. Baily, “Projections of Education Statistics to 2023,” Nat’l Ctr. for Educ. Statistics, 25-28 (Apr. 2016), https://nces.ed.gov/pubs2015/2015073.pdf.
[11] In re Spence, 541 F.3d 538, 544 (4th Cir. 2008).
[12] Id.
[13] See Rifino v. United States (In re Rifino), 245 F.3d 1083, 1089 (9th Cir. 2001) (stating that second prong of Brunner test is “intended to effect the clear congressional intent exhibited in § 523(a)(8) to make the discharge of student loans more difficult than that of other non-excepted debt”).
[14] In re Nys, 308 B.R. 436, 444 (Bankr. App. 9th Cir. 2004), aff’d, 446 F.3d 938 (9th Cir. 2006).
[15] “Comments of Bankruptcy Scholars on Evaluating Hardship Claims in Bankruptcy,” 21 J. Consumer & Com. L. 114, 116 (2018) [hereinafter Comments].
[16] See In re Nys, 446 F.3d 938, 947 (9th Cir. 2006); see also Educ. Credit Mgt. Corp. v. Spence, 341 B.R. 825, 828 (E.D. Va. 2006), aff’d sub nom. In re Spence, 541 F.3d 538 (4th Cir. 2008). (“[The debtor’s] age does not constitute an additional circumstance, especially where she does not have any age-related illnesses that affect her ability to work.”) (internal citations omitted).
[17] Rafael I. Pardo & Michelle R. Lacey, “Undue Hardship in the Bankruptcy Courts: An Empirical Assessment of the Discharge of Educational Debt,” 74 U. Cin. L. Rev. 405, 478-509 (2005).
[18] Id. at 481-482.
[19] Id. at 442-45.
[20] Id.
[21] See id. at 444.
[22] Id.
[23] See id. at 481-504.
[24] Federal Student Aid: “If your federal student loan payments are high compared to your income, you may want to repay your loans under an income-driven plan.” https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven (last visited Apr. 17, 2019).
[25] Id.
[26] John Patrick Hunt, “Help or Hardship? Income-Driven Repayment in Student-Loan Bankruptcies,” 106 Geo. L.J. 1287, 1337 (2018) [hereinafter Hunt].
[27] See id.
[28] See id.
[29] See id.
[30] See Comments, supra note 15, at 117.
[31] Consumer Fin. Prot. Bureau, Update from the CFPB Student Loan Ombudsman: Transitioning from Default to an Income-Driven Repayment Plan (May 16, 2017), https://files.consumerfinance.gov/f/documents/201705_cfpb_Update-from-S… (reporting that 1 in 50 borrowers who had recently completed rehabilitation after a default were enrolled in IDR during their first borrowing cycle following rehabilitation, while fewer than 1 in 10 had enrolled nine months later).
[32] See id. (“A combination of problematic servicing practices and government programs can prevent the most vulnerable student loan borrowers from accessing affordable repayment plans — increasing costs to taxpayers and failing to set up borrowers for success over the long term.”).
[33] Consumer Fin. Prot. Bureau, Snapshot of Older Consumers and Student Loan Debt (Jan. 2017), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201701_c… [hereinafter Snapshot].
[34] See id.
[35] See id.
[36] See id.
[37] See Hunt, supra note 26 at 1339-40.
[38] See id.
[39] See id.
[40] See id. (arguing that educational creditors should have to prove a material recovery for the availability of a plan under which student debt grows, including zero payment plans, to count against a debtor in discharge litigation).
[41] Donna Rosato, “Older Americans Are Sacrificing Retirement to Pay Off Student Debt,” Consumer Reports (Jan. 5, 2017), https://www.consumerreports.org/paying-for-college/older-americans-sacr….
[42] Gary Strauss, “Student Loan Debt Rising Among Older Borrowers,” AARP (Aug. 18, 2017), https://www.aarp.org/money/credit-loans-debt/info-2017/older-adults-stu….
[43] See AARP, The Three Generations Survey (Oct. 2018), https://www.aarp.org/research/topics/economics/info-2018/three-generati….
[44] Id.
[45] Snapshot, supra note 33 at 13.
[46] See Comments, supra note 15 at 117-18.
[47] Snapshot, supra note 33 at 12-13.
[48] See Pamela Foohey, et al., “‘No Money Down’ Bankruptcy,” 90 S. Cal. L. Rev. 1055, 1071-74 (describing the Consumer Bankruptcy Project dataset, methodology and 2007-10 data).
[49] Jesse Bricker, et al., Education Debt Owed by Older Families in the 2016 Survey of Consumer Finance, Board of Governors of the Federal Reserve System (Dec. 21, 2018) [hereinafter Bricker], https://www.federalreserve.gov/econres/notes/feds-notes/education-debt-….
[50] See id. (for the SCF, older households were defined as a family headed by a person 40 years or older).
[51] Id.
[52] See id.
[53] See id.
[54] See In re Fabrizio, 369 B.R. 238, 249 (Bankr. W.D. Pa. 2007) (debtor, 51, had taken out loans when he was in his 30s); see also In re Chapelle, 328 B.R. 565, 572 (Bankr. C.D. Cal. 2005).
[55] See Jones v. Bank One Texas, 376 B.R. 130, 139 (W.D. Tex. 2007) (“as [debtor] chose to go to school later in life, which resulted in the student loan debts persisting into her later age”).
[56] See id.
[57] See id.
[58] See Bricker, supra note 50.
[59] See William J. Hussar & Tabitha M. Baily, “Projections of Education Statistics to 2023,” Nat’l Ctr. for Educ. Statistics, 25-28 (Apr. 2016), https://nces.ed.gov/pubs2015/2015073.pdf.
[60] See id.
[61] Laurie Quinn, “Back to College After 50: The New Normal?,” Forbes (Jul. 1, 2018), https://www.forbes.com/sites/nextavenue/2018/07/01/going-back-to-colleg….
[62] See id.
[63] See id.
[64] See id.
[65] See id.