I will never forget a case I presided over while I was still a bankruptcy judge in the District of Arizona, the case of a woman I will call Myrna. Myrna had taken out student loans in the early 1970s and then decided to work in public health as a child psychologist in San Diego County, California. Myrna bought a house and helped troubled children, and she made sporadic repayments on her loans over the years.
Years later, Myrna retired, sold her house, and she and her husband moved to Arizona. Her husband did odd jobs and they collected social security. Then the student loan collector came knocking on the door. In 2010, he demanded immediate payment. Myrna filed for bankruptcy in response. Myrna had little record of her payments over the years and, tellingly, the tax collector had difficulty calculating the total amount owed. By the time Myrna appeared in my courtroom for her trial, she was seventy-three years old and owed $584,854.99.
The creditor presented no evidence, but Myrna bore the burden of proof. She had little documentation to back up her student loans or salary repayments over the years because she had taken out the loans so long ago.
I saw incredible inequalities in this case. Myrna did not meet all the legal criteria to have her student loans cancelled. However, if she had filed for bankruptcy before 1998, the law in force at the time would have canceled her loans after seven years. If she had filed for bankruptcy before 1976, she would have had her loans forgiven like any other consumer debt. But Myrna was not thinking about bankruptcy at the time.
Myrna had also worked in the public health sector which, under a later law, would have canceled her loans after 10 years of service. So, using those factors, I decided that she only had to pay for three years, depending on her income level, and the student loan debt would be forgiven. The parties subsequently stipulated a form of judgment consistent with my decision.
How did we get to such a place? Under the old bankruptcy law, student loans were treated like any other consumer debt. They were systematically forgiven. But in 1976, an amendment to the Higher Education Act which also amended the bankruptcy law changed the situation. It required that student loans not be canceled unless a period of five years after the loan was entered into had elapsed or the borrower could demonstrate that they would be under “undue hardship” if the loan was reimbursed. It was up to the courts to determine what constitutes undue hardship. The Bankruptcy Reform Act of 1978, the “Bankruptcy Code”, incorporated the changes.
In 1990, the Crime Control Bill increased the waiting period from five to seven years and added other types of loans that were difficult to forgive under the Bankruptcy Code. Finally, on October 7, 1998, President Clinton signed the Higher Education Act Amendments, which completely eliminated the waiting period. Then, only undue hardship could “free” a borrower from student loan debt in the event of bankruptcy.
Today, it is extremely difficult for student borrowers to obtain bankruptcy relief. Under current bankruptcy law, borrowers must meet the test set out in a 1985 case called “In re Brunner”, which introduced three “undue hardship” tests that borrowers must meet before their debt is discharged. canceled: the borrower lives at the poverty line, will continue to do so for the foreseeable future, and has made good faith efforts to repay the student loan debt.
If a debtor does not meet one of the criteria, the debt cannot be discharged. “In re Brunner” is followed, with some modifications, in almost every circuit court of appeals in the United States.
This standard is unfair and wrong. It is time to reverse the damage caused by these laws.
Too many Americans are hampered in their ability to advance economically by student loans. Plus, there’s a racial justice element to it. Research has shown that black and Hispanic students are disproportionately affected by the student debt crisis. They are more likely to attend for-profit colleges that do not lead to high-paying careers, and they borrow more money to attend. Black college graduates owe an average of $25,000 more in student loans than white graduates.
We have a crisis. At the end of the first quarter of 2022, Americans owed $1.59 trillion in student loan debt according to the Federal Reserve Bank of New York, an increase of $14 billion from the fourth quarter of 2021. May 31, 2022 , the Department of Education announced it would automatically wipe out $5.8 billion owed by 560,000 borrowers who attended for-profit Corinthian Colleges due to the chains’ “misbehaviour”.
President Biden is considering granting relief to borrowers by executive order. But it’s a short-term fix that won’t help future borrowers. Means testing has been proposed as an alternative to loan forgiveness, but in bankruptcy, means testing is cumbersome, complex and inefficient. Why should the means test work for student aid loans or grants?
It is time to change the bankruptcy law as it was in the past. The relief given to Wall Street should be extended to Main Street and beyond.
That bankruptcy laws be revised to cancel student loans. This is how you get out of this mess.
Sarah Sharer Curley served as a judge of the United States Bankruptcy Court for the District of Arizona from 1986 to 2014 and Chief Justice of the Court from 2001 to 2005. She was the first woman in the history of the Arizona to be a judge, then Chief Justice of the Arizona Federal Bankruptcy Court.
The opinions expressed in this article are those of the author.