Student Loan Crisis: Is Bankruptcy the Answer?

Every graduate has the same message drilled into their head by every financial aid department: bankruptcy won’t save you from your student loans. The case In Re Brunner lists several factors that would allow for discharge of your student loan debt, but practically speaking, the “Brunner Test” is a very hard burden to meet. The three-prong test is as follows: (1) that you cannot maintain a minimal standard of living if to pay the student loans; (2) that some “additional circumstances exist” that will keep you from paying your student loans for a significant portion of the loan repayment period; and (3) you have made good-faith efforts to repay your student loans. From speaking to bankruptcy attorneys and volunteering at a bankruptcy clinic, I can tell you that this is a rarely granted remedy. Personally, I have only seen these “undue hardship” discharges granted for permanently disabled borrowers.

Recent reports state that borrowers currently owe more than $1.5 trillion in student loans, with more and more borrowers defaulting and delaying major life decisions (home, marriage, a nice pair of shoes) due to their student loan debt. On one slow Friday afternoon back while I worked at a Chapter 7 Bankruptcy Clinic, I would ruminate with the law professor on how we could escape student loans without any viable hope. Most our efforts either resulted in fraud and being chased down by the U.S. Trustees and FBI.

However, there is one shining light in the congested bogs of the U.S. Congress. The “Student Borrower Bankruptcy Relief Act of 2019” currently making its way through the legislature would have an immediate and lasting impact on the student loan crisis. If the measure is passed, it would allow student loans to be dischargeable through bankruptcy. While bankruptcy remains an extreme measure, the relief would stop a debt situation that could rival the sub-prime mortgage crisis. While it is possible that making student loans dischargeable would limit the amount of future student loans that would be available, the alternative would be like the economic equivalent to Terminator 2: Judgement Day.