Mike Kueber's Blog

September 1, 2012

A primer on student debt

Filed under: Law/justice — Mike Kueber @ 3:39 am
Tags: ,

Student debt has become controversial in the past few years because of the convergence of several factors:

  • The exploding cost of college tuition has caused many students to accumulate six-figure debts.
  • For-profit colleges often match their higher tuition with unprepared or unmotivated students.
  • The Bush-Obama economy has created few good-paying opportunities that enable college graduates to repay their debts.

An article in today’s New York Times serves as an excellent primer on a fourth factor that has been on the national radar since 1976.  That is the first time that Congress attempted to restrict the ability of college students to avoid their governmental debt by filing for bankruptcy.  Congress passed even tougher restrictions in 1990 and 1998, and in 2005 it extended those restrictions to private debt incurred from for-profit colleges.

 According to the Times’ article, congressional law provides students with only a narrow exception – i.e., the so-called “Bruner test”:

  • “… named after a case that laid out a three-pronged standard for judges to use when determining whether they should discharge someone’s student loan debt. It calls on judges to examine whether debtors have made a good-faith effort to repay their debt by trying to find a job, earning as much as they can and minimizing expenses. Then comes an examination of a debtor’s budget, with an allowance for a ‘minimal’ standard of living that generally does not allow for much beyond basics like food, shelter and health insurance plus some inexpensive recreation.  The third prong, which looks at a debtor’s future prospects during the loan repayment period, has proved to be especially squirm-inducing for bankruptcy judges because it puts them in the prediction business. This has only been complicated by the fact that many federal judicial circuits have established the ‘certainty of hopelessness’ test that Mr. Wallace must pass in Ohio.”

Attempting to discharge student debt through bankruptcy is extremely rare, and the conventional wisdom has been that the onerous, almost insurmountable standards of the Bruner test have scared litigants off.  The Times’ article, however, reports that two recent studies have found that litigants under the restrictive congressional law have been able to obtain relief 39% and 57% of the time.  Thus, the stronger argument is that the administrative/legal cost of obtaining relief exceeds the financial benefit of to the student.

As they didn’t teach us in law school, the wheels of justice don’t turn unless somebody can pay for it.


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