By John P. Hunt
Student loans, unlike other debts, are not dischargeable in bankruptcy unless the debtor starts a special proceeding and proves that repayment would cause “undue hardship.” This requirement probably accounts for the fact that only a tiny fraction of bankrupt debtors succeed in discharging their student loans. This article is the first to make the case that student- loan nondischargeability interferes with achieving the student-loan programs’ goals and to propose solutions that courts and the Department of Education (the Department) can employ under current law.
The article draws on the legislative history of the student-loan programs to establish that they serve at least four distinct purposes: providing equality of access to higher education, educating the population for the benefit of the country, enabling students’ free choice of career, and providing a benefit to students.
The article then looks to the empirical literature and to fundamental precepts of bankruptcy law to show that nondischargeability can thwart the purposes of the student-loan programs through four different effects: deterring students from higher education, distorting career choice, discouraging borrowers from economic and social participation, and rendering student loans harmful to borrowers.
Accordingly, nondischargeability should be applied narrowly, only in situations where its goals are advanced without undue interference with other goals of the programs. The article offers ideas for tempering each of the four negative effects. To avoid deterring education, the fact that bankruptcy relief often can be had if requested should be made more salient. To combat distortion of career choice, bankruptcy courts should stop ruling that debtors should abandon lower-paying jobs for which their education has prepared them. To mitigate borrower discouragement and harm, courts and the Department should take account of the likelihood of these effects in deciding on discharge. The debt-income ratio may be a proxy for discouragement, and inability to find a job in one’s field may be a proxy for harm.
John P. Hunt, Tempering Bankruptcy Nondischargability to Promote the Purposes of Student Loans, 72 SMU L. Rev. 725 (2019).