Help or Hardship? Income-Driven Repayment in Student-Loan Bankruptcies
Citation: 106 Geo L.J. (2018)
Roughly $152 billion of student loans are ninety or more days delinquent. Bankruptcy would seem to be an appropriate way to address this problem, but student-loan debtors labor under a unique disadvantage. Such debtors must show “undue hardship” to get a bankruptcy discharge of their student loans. Because the bankruptcy system provides permanent debt relief through granting a discharge, this “undue hardship” requirement is an ob-stacle for student-loan debtors. At the same time, the federal government offers an option for most student loans that may make repayment easier: income-driven repayment (“IDR”) plans, under which the debtor makes payments of ten to twenty percent of discretionary income for twenty to twenty-five years, after which any outstanding balance is cancelled.
This Article addresses how the availability of IDR should affect the analysis of undue hardship in student-loan bankruptcy. It reviews legislative history and Supreme Court precedent pertinent to bankruptcy’s fresh-start policy, the student-loan exception to dischargeability, and the IDR programs, 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 nondischargeability is that of creditor recovery. Third, IDR is intended to 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 the debtor could not maintain a minimal standard of living while making IDR payments, or 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. Other possible consequences of IDR include negative amortization—loan balances that increase because payments are not enough to cover accumulating interest on the debt— and tax liability upon discharge because the forgiven debt is treated as income. These consequences should 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, unless IDR actually would provide a viable alternative to discharge.