Consent to Student-Loan Bankruptcy Discharge

Abstract

As the Department of Education reconsiders its rules governing consent to discharge of federal student loans in bankruptcy, this Article argues for the first time that the Department should approach the problem specifically as an operator of programs to promote education and benefit students, rather than as an entity interested only in debt collection. The Article shows that the Department’s rules to date have treated whether to consent to discharge primarily as a pecuniary issue, without regard to the educational goals of the student-loan programs. For example, the Department apparently has never considered whether making it difficult to discharge student loans interferes with borrowers’ freedom of career choice or deters students from pursuing higher education in the first place.

Discharge should be more predictable for borrowers. The Department’s regulations have given ever more nontransparent discretion to student-loan holders to decide whether to oppose discharge. This Article joins the scholarly call for the Department to remedy this situation by adopting objectively defined criteria for loan holders’ consent to discharge. Creating such “safe harbors” for borrowers would eliminate the uncertainty and formidable procedural barriers that attend seeking relief adversarially in bankruptcy court and that may deter as many as 69,000 eligible borrowers a year from seeking to discharge their student loans in bankruptcy.

The Article argues that furthering the educational purposes of the student-loan programs calls for the Department to consent to discharge more freely. Currently, the only substantive ground for consent is the presence of “undue hardship,” as that term from the Bankruptcy Code has been interpreted by courts. But judicial tests for undue hardship do not take account of discharge-favoring purposes of the student-loan programs. To fulfill its mandate, the Department should consent to discharge in cases where failure to do so would thwart the purposes of the student-loan programs, even if undue hardship is absent.

Keywords: student loans, bankruptcy, undue hardship, loan forgiveness, modify or compromise, administrative law, education department, settlement, student loan bankruptcy, education law

JEL Classification: K23, K35