Emerging Trends in Student Loan Law. Minnesota Bankruptcy Institute John Rao

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1 Emerging Trends in Student Loan Law Minnesota Bankruptcy Institute John Rao National Consumer Law Center 2013

2 Student Loan Debt in 2013 Aggregate total exceeds $1.2 trillion more than is owed on credit card debt more than is owed on auto loans 37 million Americans owe student loans 20% of American households

3 Average Amounts Borrowed 2013 undergraduate: $35, grad. school: $43, law school: $100, med. school: $162,000

4 Borrowers by Age Under 30: 40% owe student loan debt Between 30 39: 25.1% owe student loan debt Over 50: 16% owe student loan debt Parents: 17% co-sign or borrow for children s education

5 Default Rates Default = status after 9 months of delinquency For borrowers who entered repayment in 2009, 8.8% had defaulted by the end of % at For-Profit Institutions 7.2% at Public Institutions 4.6% at Non-Profit Institutions Three-year default for FY2009 was 13.4% (22.7% for for-profit institutions)

6 Default and Delinquency For borrowers who entered repayment in 2005: 25% have been delinquent 15% have defaulted Only 37% are repaying loans on time without deferrals or restructuring

7 The Traditional Borrower 7

8 The Non-Traditional Borrower A nontraditional student is one who*: delays enrollment; attends part time; works full time; is financially independent; has dependents other than a spouse; is a single parent; or does not have a high school diploma. * Dept. of Ed definition 8

9 Non-Traditional Students Nontraditional students actually outnumber traditional students Out of 19 million students, only 7 million students fit the traditional profile 37% of students are 25 years or older 61% of Pell grant recipients are independent students, indicating they are at least 25 They are more likely to rely on student loans than their traditional student peer 9

10 IBR-in-Brief Annual student loan payments must be greater than 15% of the difference between AGI and 150% of poverty 10% for IBR in 2014 If in default, must consolidate or rehabilitate 25 years of payment required (changes to 20 years in 2014) Must recertify every year Balance forgiven is taxable Not available for private student loans 10

11 Public Service Forgiveness Only Direct Loans Must not be in default Must make 120 payments (10 years of payments) AFTER Oct. 1, 2007 Payments must be made through eligible payment plans Must be employed in a public service job at the time of the forgiveness and must have been employed in the job during the period in which borrower made each of the 120 payments Forgiveness amount not taxable 11

12 Separate Classification in Chapter Contents of plan * * * (b) Subject to subsections (a) and (c) of this section, the plan may (1) designate a class or classes of unsecured claims, as provided in section 1122 of this title, but may not discriminate unfairly against any class so designated; however, such plan may treat claims for a consumer debt of the debtor if an individual is liable on such consumer debt with the debtor differently than other unsecured claims;

13 The Courts Weigh In Judicial Standards for separate classification In re Leser, 939 F.3d 669 (8th Cir. 1991) (1) whether the discrimination has a rational basis; (2) whether classification is necessary to debtor s rehabilitation under chapter 13; (3) whether the discrimination is proposed in good faith; and (4) whether there is meaningful payment to class discriminated against

14 Separate Classification Allowed Permitting Public Service Forgiveness eligibility advances debtor s fresh start Less discriminatory approach would leave the debtor or creditors worse off Concurrent payment of student loans and secured debts, followed by payment in full of unsecured debt Unsecured creditors receive at least as much as they would in chapter 7 proceeding

15 Separate Classification Not Allowed Nondischargeability, by itself, does not justify discrimination Public policy favoring student loan repayment or debtor s fresh start is not reasonable justification Avoiding harm to the debtor is not a reasonable basis for discrimination No proof that discrimination is necessary or reasonable

16 Long-Term Debt Is classification for long-term debt under 1322(b)(5) subject to unfair discrimination test under 1322(b)(1)? What is the impact of the BAPCPA amendment in 1322(b)(10)?

17 What About Co-Debtors? Does the co-debtor stay under 1301 protect parents or other family members who may have co-signed the debtor s student loan? Do student loans co-signed by parents for children fall into the 1322(b)(1) consumer debt exception, permitting separate classification? Does the however clause eliminate or qualify the fairness requirement?

18 Student Loan Payments Using Funds in Excess of Projected Disposable Income Separate classification where funds used for direct payment to student loan creditors are in excess of projected disposable income Above-median debtor pays student loan from discretionary income earned in excess of PDI Below-median debtor extends plan to five years

19 Student Loan Payments as Special Circumstances Under the Means Test Is obligation to pay student loan an expenditure for which there is no reasonable alternative? Does it matter that student loan debt is incurred voluntarily? Does it matter that without disposable income adjustment student loan indebtedness will increase? Is separate classification a reasonable alternative?

20 Section 523(a)(8): Undue Hardship Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987) (1) the debtor cannot maintain, based on current income and expenses, a minimal standard of living for herself and her dependents if forced to repay the loans; (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; (3) the debtor has made good faith efforts to repay the loan

21 Section 523(a)(8): Undue Hardship In re Long, 322 F.3d 549 (8 th Cir. 2003) ( totality of circumstances test) considers: (1) the debtor s past, current, and reasonably reliable future financial resources; (2) the debtor s and the debtor s dependents reasonable necessary living expenses; (3) any other relevant facts and circumstances

22 Recent Criticism of Brunner Roth v. Educational Credit Management Corp. (In re Roth), 490 B.R. 908 (9th Cir. BAP 2013) (Pappas, J., concurring): Brunner is too narrow, no longer reflects reality, and should be revised Significant changes in the statutory landscape since 1987 In 1987, student loans were dischargeable five years after the loan first became due Expansion in loans covered by the statute Educational borrowing has changed drastically

23 Income Based Repayment Plans Some courts have held that debtor cannot satisfy second or third prong of Brunner test if debtor does not enter such a plan Other courts hold no per se rule requiring debtor to enter ICRP/IBR plan to show good faith: Tirch, 6 th Cir Mosley, 11 th Cir Krieger, 7 th Cir. 2013

24 Income Based Repayment Plans ECMC v. Jesperson, 571 F.3d 775 (8th Cir. 2009): Placing undue weight on the debtor s ability to qualify for ICRP improperly limits the inherent discretion afforded to bankruptcy judges. In re Nielsen, 502 Fed. Appx. 634 (8th Cir. 2013) (unpublished decision): bankruptcy court did not err in considering debtor s eligibility for the ICRP as one factor in its analysis

25 Partial Discharge In re Conway, 495 B.R. 416 (B.A.P. 8th Cir. 2013): although partial discharge of student loan not available in circuit, application of 523(a)(8) to each of multiple loans separately not only allowed, but required Debtor had 15 separate private student loans totaling $118,000 Debtor was not seeking discharge of her other federal loans being paid through ICRP

26 Standard of Review Hedlund v. Educ. Resources Institute, 748 F.3d 848, 854 (9th Cir. 2013); Krieger v. Educ. Credit Management Corp., 713 F.3d 882, 884 (7th Cir. 2013): because bankruptcy court s good faith inquiry is essentially a factual determination, a reviewing court should apply a clear error standard to the bankruptcy court s evaluation

27 Ten Things to Consider When Applying Brunner 1. Debtor could get discharge by waiting 5-7 years when Brunner was adopted 2. Many debtors 20 to 30 years ago were able to repay student loans in reasonable time; debtors now carry exorbitant debt for life 3. Extreme collection tools now exist (administrative wage garnishment; tax refund and benefits offset; no statute of limitations for government loans; excessive collection fees) 4. Should administrative repayment plans be sole determinant of good faith under Brunner third prong? 5. What are the tax consequences of income based repayment plans?

28 Ten Things to Consider When Applying Brunner 6. Foreseeable inability to repay under Brunner second prong should be loan term (10 years), not years 7. IBR and other administrative repayment plans are not available for private student loans 8. Debtors need to recertify and make required payments for IBR and other plans every year for years to avoid redefault (no statistics currently available on plan redefaults) 9. Plans can lead to negative amortization 10.Debtors are not always eligible for administrative repayment plans (debtor must get out of default by consolidation or rehabilitation)

29 The nonprofit National Consumer Law Center (NCLC ) helps build family wealth for low-income and other disadvantaged people in the U.S. by offering advocacy expertise through publications, policy analysis, research, litigation services, and training.