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December 01, 2009 6:11 PM Supreme Court Looks at Student Loans, Bankruptcy

By Daniel Luzer

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One of the more disturbing aspects of higher education pricing in the last decade or so is the proliferation of student debt. But even when one files for bankruptcy, student loans stick around. This may change.

Today, with United Student Aid Funds Inc. v. Espinosa, the U.S. Supreme court is looking at bankruptcy rules for people with extreme debt due to student loans. As it stands, when one files for bankruptcy, many debts can be excused. Some debts are special and very hard to excuse. These debts include including back taxes, child support, and student loans. In order to get out of these debts, someone must prove that paying back the money would “impose undue hardship.” According to the National Consumer Law Center’s Student Loan Borrower Assistance Project:

Courts use different tests to evaluate whether a particular borrower has shown an undue hardship. A common test is the Brunner test which requires a showing that 1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans; 2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and 3) the debtor has made good faith efforts to repay the loans. (Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987). Not all courts use this test. Some courts will be more flexible.

This seems vague. No kidding. The case the Supreme Court hears today concerns a Phoenix airline ramp agent, Francisco Espinosa, who took out some $13,000 in student loans. Espinosa filed for bankruptcy protection in 1992 and created a payment schedule that would require him to pay back the principal, but not the interest on the loan. Espinosa did not prove “undue hardship.” According to an article about the case in Education Week:

Later, under a reinsurance plan for the federally backed loans, the U.S. Department of Education began collection efforts against Espinosa for the outstanding interest from his student loans. Espinosa went back to the bankruptcy court seeking it to order the creditors to cease their collection efforts. Espinosa eventually won a ruling from the U.S. Court of Appeals for the 9th Circuit… that his bankruptcy plan was valid and that the lender could not collect any more from him.

According to Justice Ruth Bader Ginsburg’s dialogue with Espinosa’s lawyer, a win for the debtor would come down to “taking a burden that Congress has put on the debtor and switching it to the creditor.” Many argue that this sort of change might be a very good idea.

The court should reach a decision by the summer.

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer