The Lawletter Vol 35 No 9, National Legal Research Group
This is the time of year when most high school seniors make their final decisions about where to enroll in college. Because of the exorbitant price of a college education, particularly at four-year private colleges, that decision often comes down to which college offers the best financial package. For many students, even those with merit scholarships and other assistance, student loans will make up a part of their tuition payments. The problem then becomes how to pay these loans back and what choices are available if the student is unemployed or underemployed when the loans become due.
Bankruptcy protection is limited for the student who cannot meet his or her loan payments when they become due. If a student files for bankruptcy protection, under 11 U.S.C. § 523, student loans guaranteed, insured, or funded by the Government may not be discharged unless the student can demonstrate that the debt, if nondischarged, "would impose an undue hardship on the debtor and the debtor's dependents." 11 U.S.C. § 523(a)(8). To meet the undue hardship requirement, the student-debtor must show that while s/he has made a good-faith effort to repay the loan, if nevertheless forced to repay the loan, s/he would not be able to maintain a minimal standard of living based on her/his current income and expenses and that the situation would persist for a significant portion of the repayment period. In re Barrett, 487 F.3d 353, 358-59 (6th Cir. 2007); see also In re Saxman, 325 F.3d 1168 (9th Cir. 2003) (holding that the bankruptcy court may grant a partial discharge of a student loan upon the proper showing of hardship). In a case of first impression, the court in In re Cassim, 594 F.3d 432 (6th Cir. 2010), held that a Chapter 13 debtor may file an adversary proceeding to determine the dischargeability of a student loan and that the case will be constitutionally ripe for review even where the debtor has not received a discharge.
Importantly, the discharge provision in § 523(a)(8) applies only to Government-guaranteed student loans. In In re Chambers, 348 F.3d 650 (7th Cir. 2003), the court held that the student's debt to a university for unpaid tuition and other fees was distinguishable from an educational loan that is nondischargeable under the Bankruptcy Code. See also In re Peller, 184 B.R. 663 (Bankr. D.N.J. 1994) (a student's unpaid tuition bill is dischargeable in bankruptcy). The reason for this discrepancy is that no funds actually changed hands and there was no agreement between the student and the university to pay tuition at a later date. Under these decisions, therefore, a student may discharge a breached agreement to pay tuition to a college but cannot discharge a Government-guaranteed loan agreement entered into to pay the college tuition.