A No-Contest Discharge for Uncollectible Student Loans

Abstract

Over forty-four million Americans owe more than $1.6 trillion in student loan debt. This debt is nearly impossible to discharge in bankruptcy. Attempting to do so may require costly and contentious litigation with the Department of Education. And because the Department typically fights every case, even initial success can be followed by years of appeals. As a result, few student loan borrowers attempt to discharge their student loan debt in bankruptcy.

In this Article, we call on the Department of Education to develop a set of ten easily ascertainable and verifiable circumstances in which it will not contest a debtor’s attempt to discharge their student loan debt. Nearly every category of no-contest discharge we recommend represents a circumstance where the debtor would clearly suffer an undue hardship if forced to continue to attempt repayment. In those circumstances, the Department of Education should conserve taxpayer dollars by consenting to discharge. Specifically, we urge the Department of Education to allow a no-contest discharge when the debtor’s income is less than 150 percent of the federal poverty level and at least one of the following:

(1) the debtor’s household income has been at or below the federal poverty level for the last four years;
(2) the debtor receives disability benefits under the Social Security Act;
(3) the debtor receives disability benefits because of military service;
(4) the debtor’s income is derived solely from retirement benefits;
(5) the debtor is a caregiver of an adult or child as defined in the Lifetime Respite Care Act;
(6) the debtor is a family caregiver of an eligible veteran;
(7) the debtor did not receive a degree from the institution, or the institution closed;
(8) the debtor’s student loan balance is less than $5,000;
(9) the debtor made at least three hundred monthly payments (twenty-five years’ worth) towards their student loans, regardless of whether those payments were made continuously; or
(10) the debtor is over the age of sixty-seven.

Our proposal will not solve every problem, but it would go a long way toward resolving many of the grosser inequities currently associated with student loans and their treatment in bankruptcy.