Help or Hardship?: Income-Driven Repayment in Student-Loan Bankruptcies

Abstract

A drawback of student loans is that a debtor must show “undue hardship” to discharge them in bankruptcy. An advantage of student loans is that most of them may be repaid using income-driven repayment (“IDR”) plans, under which the debtor can satisfy the obligation by paying a share of income over a specified time, even if the payments do not reduce the loan balance to zero.

This Article addresses how the availability of IDR should affect the analysis of undue hardship in student-loan bankruptcy. It reviews relevant legislative history and Supreme Court precedent and draws three principal conclusions. First, the policies supporting a fresh start in bankruptcy apply to student loans, even if participating in IDR would result in an affordable payment. Second, when student loans have been in repayment for more than five years, the only policy supporting non discharge ability is that of creditor recovery. Third, IDR should make life easier for student-loan debtors, not to increase their exposure to hardship through denial of discharge.

This Article applies these findings to several factual situations common in student-loan bankruptcy. It argues that IDR’s availability should not count against discharge if IDR would extend the repayment period and the debtor could not maintain an above-minimal standard of living during the repayment period. In bankruptcies commenced after five years of repayment, the student-loan debtor generally should receive discharge if the creditor cannot show a substantial likelihood of significant repayment, so the availability of a zero-payment IDR plan should not weigh against discharge. The possibilities under IDR of negative amortization and tax liability weigh in favor of discharge, potentially by increasing the level of expected repayment the creditor must demonstrate. The debtor’s failure to learn about IDR usually should not count against the debtor.

Keywords: student loans, bankruptcy, undue hardship, IDR, income-driven repayment, income-based repayment, IBR, pay as you earn, PAYE, income-contingent repayment, ICR, fresh start, Brunner test, negative amortization