An Unduly Difficult Standard to Prove

Yesterday, we took issue with arguments made by a key lawmaker who helped defeat a measure in the U.S. House of Representatives that would have allowed financially-distressed borrowers to discharge their private loan debt in bankruptcy.

In attacking the proposed amendment to the House Higher Education Act reauthorization legislation, Rep. Ric Keller of Florida, the ranking Republican on the House subcommitee on higher education, said that "the current system" offers borrowers who find themselves in dire straits with all of the relief they need. He argued that struggling borrowers can work with private loan providers to obtain "more flexible" repayment options. He also noted that private loan borrowers who demonstrate that repaying their loans would cause "undue financial hardship" can have their loans discharged in bankruptcy.

"The Bankruptcy Code," Keller said, "already provides a provision for undue hardship for those people who truly need it."

In yesterday's post, we noted that far from being flexible, private loan providers are often unwilling to help struggling borrowers find ways to make repayment easier. Today, we take a closer look to see how well the "undue financial hardship" standard works in practice.

Researchers from Tulane University tackled that question in 2005, when they conducted an empirical study of 286 undue hardship decisions involving student loan borrowers. The authors of the study, which was published in the University of Cincinnatti Law Review, found little statistical difference in the characteristics and financial circumstances of those borrowers who were successful in getting their student loans discharged [57 percent of the cases granted the debtor some form of relief] and those who weren't [43 percent of the cases]. The researchers -- Rafael I. Pardo, an associate professor of law, and Michelle R. Lacey, an assistant professor of mathematics -- concluded that bankruptcy judges have applied the undue hardship standard unevenly and even "haphazardly." They wrote:

"What has proved to be most troublesome regarding application of the law has not been the infrequency with which relief has been granted, but rather the haphazard fashion in which courts have determined whether a debtor's circumstances support a claim of undue hardship that warrants forgiveness of educational debt."

Ultimately, whether or not one receives a discharge depends largely on the judge hearing the case, the researchers say. Judges have wide discretion, because Congress never adequately defined how courts should apply the undue hardship status. As a result, many judges have taken to making value judgments based on whether they believe individual borrowers deserve to have their loans discharged. These judgments often rest on the court's evaluation of "the debtor's prebankruptcy conduct." In other words, judges tend to try to assess "whether the individual debtor's bankruptcy stems from irresponsibility or rather true misfortune."

For example, some judges have faulted borrowers for their career decisions. In those cases, the courts have questioned whether borrowers who chose to pursue a low-paying career truly made "a good faith effort" to repay their debt. In one such case, according to the National Consumer Law Center, a judge denied a pastor's request for bankruptcy relief from his student loans "because his decision not to maximize his earnings, though commendible, was voluntarily made." In another, a borrower's bid was rejected because he had chosen to work as a cellist, rather than pursue a more lucrative position in the field he was trained. Yet a third court rejected the other courts' criteria, arguing that the fact that a debtor had chosen to work as a minister is "not by itself evidence of bad faith and should not be used against the debtor under undue hardship test."

While these are just a small sample of cases, they show how subjective and arbitrary are the determinations that different judges have made. In a recent case, Speer v. Educational Credit Management Corp., a lower court judge expressed frustration in his ruling that courts have received “absolutely no guidance” as to how to define “undue hardship” other than by using “a Webster’s dictionary.” That judge added:

"Basically, the application of this standard requires each court to apply its own intuitive sense of what “undue hardship” means on a case by case basis. With so many Solomons hearing the cases, it is no wonder the results have varied.”

Far from guaranteeing relief to those private loan borrowers "who truly need it," as Mr. Keller claims, courts have applied the undue hardship standard inconsistently, leaving many desperate private loan borrowers with no way out. Low-income and minority students who have fallen victim to predatory private student loan practices by Sallie Mae and other lenders -- and have not received a quality education -- should not have to hope and pray that they get lucky and have their case heard by a sympathetic judge.

The time has come for Congress to treat private student loans the same as other forms of consumer debt when it comes to bankruptcy. Hopefully, with a little education, Mr. Keller and at least several dozen of the other 235 lawmakers who voted against the amendment will have a change of heart.