By Breyon Love, JD, MBA
Class of 2021, Stetson University College of Law
Since the Great Recession, student loan debt has increased by over 160%, surpassing the growth of mortgage, auto loan, and credit card debt.1 With over $1.7 trillion in outstanding student loans, student loan debt is arguably the most significant economic problem facing
the United States.2 Yet for Black and minority families, the student loan debt crisis is in a state of emergency. According to The Washington Post, the fastest-growing category of student loan debt in the last 10 years are Black students and people over the age of 50. From 2003-2004, the Department of Education studied a cohort of new college students and found that 78% of Black students took out loans for their education, compared to 57% of White students.3
This racial disparity was driven by lower-income students who need student loans to pay for school. Alice Rivil4, head of the Johnson administration student loan task force that created the Federal student loan program, stated the program was intended to empower
minorities and the poor. Unfortunately, the promised return on investment for student loan debt often does not materialize the same for Black students. Upon graduation, Black students are less likely to be hired into a high wage-career, and at all levels, Black graduates earn less than their White counterparts.5
Recent Efforts for Reform
Currently, the heightened awareness of racial inequality has refueled the conversation of systematic economic inequality, pressuring government policymakers to find a permanent solution. In April 2021, Congresswoman Ayanna Pressley (MA-07), accompanied by Senator Elizabeth Warren (D-MA) and Massachusetts Attorney General Maura Healey, held a press conference asserting that student loan debt is a racial inequality crisis and
pressuring President Biden to cancel $50,000 of student loan debt per borrower.
In 2018, Federal Reserve Board Chair Jerome Powell informed Congress that the nondischargeability of student loan debt poses a significant risk to future economic growth, citing the negative impact on people who cannot pay their student loans. House Judiciary Chair Jerrold Nadler responded by introducing the Student Borrower Relief Act of 2019. This law would have repealed 11 U.S.C. § 523(a)(8) entirely, thereby allowing borrowers to discharge nonprofit, government, and private student loans in bankruptcy, just like many other forms of unsecured debt.
Recently, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which paused student loan payments and waived interest on all federally held student loans until September 30, 2021.6 Furthermore, because there is bipartisan support for temporary student loan relief, some believe more comprehensive forms of student loan debt relief may be on the horizon.
Student Loan Debt in Bankruptcy
Under 11 U.S.C. § 523(a)(8), educational debt is excepted from the discharge unless repayment of student loan obligations imposes an undue hardship. Congress’s
failure to define “undue hardship” has led to a variety of interpretations (or inconsistent interpretations) by bankruptcy courts. As a result, various tests have emerged in bankruptcy courts; yet, only two tests have prevailed. The majority approach applies the Brunner test developed by the Second Circuit.7 The minority approach applies a less-restrictive totality-of-the-circumstances test.8 Currently, the First and Eighth Circuit are the only circuits to adopt the totality-of-the-circumstances test.
Examining the Majority Approach: the Brunner Test
Under Brunner, a debtor seeking a student loan discharge must show: (1) that the debtor cannot maintain a minimal standard of living for himself or herself and his or her dependents; (2) that this state of affairs is likely to persist for a significant portion of the student loan; and (3) that the debtor has made good faith efforts to repay the loan.9
The Brunner test requires the satisfaction of all three prongs for the court to discharge student loans.10 Courts applying Brunner require more than severe financial
difficulty, and debtors are expected to provide evidence of extraordinary circumstances beyond financial inability.11 Congress may have intended to provide some exception
to student loan dischargeability through the undue hardship language, yet courts have strictly construed this standard leading to very little relief.
Due to the improbability of success under the Brunner test, most debtors fail to initiate adversary proceedings under section 523(a)(8) because such challenges are expensive and unlikely to succeed. Consequently, a debtor who challenges and fails to meet the undue hardship standard will be stuck paying the student loan debt along with any litigation fees incurred. Between 2011 and 2019, more than 200,000 debtors per year had student loan debt; however, fewer than 600 of those debtors – or less than 0.1% – tried to discharge those loans through an adversary proceeding.12
For Black debtors, the risk of litigation is even greater. Research shows that Black debtors are 40% less likely to receive a discharge than debtors of other races.13 Additionally, Black debtors are twice as likely to file under chapter 13 than other races. Due to the preference
towards filing under chapter 13, only 69.1% of Black debtors eventually receive a discharge, compared to 87.5% of White debtors.14 Further, empirical data shows that chapter 13 trustees are twice as likely to file a motion to withhold the discharge against a Black debtor who completed a chapter 13 plan than against a similarly-situated White debtor.15 In light of these findings, consumer bankruptcy attorneys, judges, and
trustees should consider how implicit bias may be preventing Black debtors from obtaining the fresh start contemplated by the Bankruptcy Code.
Examining the Minority Approach: the Totality-of-the-Circumstances Test
The Eighth Circuit adopted the totality-of-the-circumstances test over the Brunner test because Congress did not intend to strictly diminish the bankruptcy court’s discretion under section 523(a)(8). The totality-of-the-circumstances test instructs courts to evaluate factors such as: (1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor’s and his or her dependent’s reasonable necessary
living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case.16 In sum, this test essentially provides that student loan debt should be excepted from the discharge only if the debtor’s future financial resources will provide for payment of the debt and enable the debtor to achieve a minimal standard of living.17
The Brunner test and the totality-of-the-circumstances test differs in significant two ways. First, the totality-of-the-circumstances test is broadly construed, giving bankruptcy courts considerable flexibility which leads to more positive results.18 Notably, if a debtor fails to
satisfy any one factor, it does not automatically lead to the exception of the debt from the discharge.19
Additionally, when evaluating the debtor’s finances, the totality-of-the-circumstances test considers more factors to ascertain a reasonable living, as opposed to Brunner’s harsh minimal standard of living approach.20 In all, the totality-of-the-circumstances test takes a more forgiving approach compared to the Brunner test.21
For Black and minority debtors, the totality-of-the-circumstances test provides courts with the best opportunity to fashion equitable relief. By allowing flexibility, the court can account for individual circumstances that may call for undue hardship, rather than be tied to Brunner’s rigid line.22 For instance, when weighing the first factor of the totality-of-the-circumstances test, courts may consider race-specific financial factors affecting Black debtors. If more courts adopt the totality-of-the-circumstances test, we will likely
see an increase of successful student loan discharges for all debtors, including those that are most impacted.
The purpose of the federal student loan program was to empower minorities and the poor by providing access to higher education. Yet it has evolved into the continuation of financial oppression for communities of color. Considering the looming student loan debt crisis and its disparate impact on minority communities, policymakers must take a hard look at reforming Section 523(a)(8) of the form to the Bankruptcy Code without corresponding student loan debt relief from Congress will likely be insufficient to afford broad relief. This is because many Black borrowers may not file for bankruptcy and may
never generate wealth at the level of their non-Black counterparts. So, Congress must acknowledge and fix the inequitable impact of student loan debt on communities
of color by enacting legislation that will: (1) cancel up to $50,000 of student loan debt; and (2) intentionally facilitate a fresh start for Black families encumbered with student loan debt. Intentional legislation by Congress is necessary to counteract the significant damage inflicted on minority communities by decades of predatorye Bankruptcy Code. This can be accomplished in a variety of ways.
First, Congress should enact Representative Nadler’s Student Borrower Relief Act, which would repeal Section 523(a)(8) and allow student loan debt to be discharged like other forms of unsecured debt. Second, reform to the Bankruptcy Code without corresponding
student loan debt relief from Congress will likely be insufficient to afford broad relief. This is because many Black borrowers may not file for bankruptcy and may never generate wealth at the level of their non-Black counterparts. So, Congress must acknowledge and fix the inequitable impact of student loan debt on communities of color by enacting legislation that will: (1) cancel up to $50,000 of student loan debt; and (2) intentionally
facilitate a fresh start for Black families encumbered with student loan debt. Intentional legislation by Congress is necessary to counteract the significant damage inflicted on minority communities by decades of predatory student loan policies. Third, all courts should adopt the Eighth Circuit’s totality-of-the-circumstances test because it truly embraces the core value of bankruptcy to provide debtors a fresh start. When evaluating the debtor’s reasonable financial expenses, along with the current factors, courts should require the debtor to have a safe and decent standard of living. Additionally, courts
should include the racial and socioeconomic impact of student loan debt in their analysis. Adopting any of these recommendations will give equitable student loan debt relief for all Americans, particularly those affected the most: families in Black and minority communities.
1 Michael Herz, Emerging Cracks in the Student Loan Wall, ABI (September 10, 2019, 16:39), https://www.abi.org/committee-post/emerging-cracks-in-the-student-loan-wall#_ftn4.
3 Jen Mishory and Mark Huelsman, How Student Debt and the Racial Wealth Gap Reinforce Each Other, Report Higher Education (September 9, 2019), https://tcf.org/content/report/bridgingprogressive-
4 Alice Rivil was an economist for the Johnson and Nixon administration who created the blueprint of the Higher Education Act of 1972.
5 Mishory, supra.
6 S.3548- CARES Act, 116th Cong., 2nd Sess. (2019-2020).
7 Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395, 396 (2nd Cir. 1987).
8 In re Andrews, 661 F.2d 702, 704 (8th Cir. 1981); In re Long, 322 F.3d 549, 554 (8th Cir. 2003).
9 Brunner, 831 F.2d at 396.
10 Charles J. Tabb, Law of Bankruptcy 995 (11th ed. 2019).
11 National Bankruptcy Review Commission Final Report, Bankruptcy: The Next Twenty Years 211 (1997).
12 Leslie Pappas and Daniel Gill, Private Student Loan Debtors Win Limited Bankruptcy Reprieve (1), Bloomberg Law, https://www.bloomberglaw.com/product/blaw/bloomberglawnews/bankruptcylaw.
13 Rory Van Loo, A Tale of Two Debtors: Bankruptcy Disparities by Race, Scholarly Commons at Boston University School of Law (January 29, 2009 2:11 PM), 233-35.
15 Id. at 238.
16 In re Andrews, 661 F.2d 702, 704 (8th Cir. 1981); In re Long, 322 F.3d 549, 554 (8th Cir. 2003).
17 Long, 322 F.3d at 554.
18 Ryan Freeman, Student-Loan Discharge- an Empirical Study of the Undue Hardship Provision of S 523(a)(8) Under Appellate Review, 30 Emory Bankr. Dev. J. 147, 160–61 (2013).
20 Richard D. Burke III, Bankruptcy-Student Loans for Life, the Discharge of Student Loans Under 11 U.S.C. S 523(a)(8)-Using the Eighth Circuit’s Totality-of-the-Circumstances Test and the Partial Discharge Method, 41 UALR L. Rev. 97, 105 (2018).
22 Sarah Edstrom Smith, Should the Eighth Circuit Continue to Be the Loan Ranger? A Look at the Totality of the Circumstances Test for Discharging Student Loans Under the Undue Hardship Exception in Bankruptcy, 29 Hamline L. Rev. 601, 620 (2006).