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Published in 44 Canadian Bus. Law J., 2006, 245


PAPER #07-005










John A. E. Pottow*


Student loans are not dischargeable in personal bankruptcy proceedings in the United States. Why is that so? The answer to that question has remained largely unexamined in bankruptcy scholarship to date. Doctrinal and empirical pieces have sprouted up here and there (some quite good), but theoretical treatment has been sparse. This article seeks to help fill that void. It assembles various defensible theories (some more defensible than others) under which student loans should be treated as nondischargeable debts. It then takes a comparative perspective by looking at how the laws in various jurisdictions square with these theories. The United States rates poorly; its laws tend toward implementation of the least defensible theories and only tangentially embrace the more compelling ones. By contrast, countries such as Australia and New Zealand, which take an income-contingent approach to student debt default, are on the right track.


* Assistant Professor of Law, University of Michigan Law School. Thanks to Stephanie Ben-Ishai, Rich Friedman, Sir Roy Goode, Reshma Jagsi, Elizabeth Warren, Jim White and Jacob Ziegel for comments and Rita Abro, Trevor Broad, Mike Murphy and Elizabeth Nestor Haas for research. This paper was developed from a presentation to the 35th Annual Commercial and Consumer Law Workshop, held at the University of Toronto Faculty of Law, October 2005; participants there were most helpful too.




John A.E. Pottow*


In fiscal year 2002, approximately 5.8 million Americans borrowed $38 billion (USD) in federal student loans. This was more than triple the $11.7 billion borrowed in 1990.1 As a rule of thumb, tuition has been increasing at roughly double the rate of inflation in recent years.2 This troubling trend of accelerating tuition, coupled with the fact that real income has stagnated for men and increased only modestly for women over the past two decades,3 means that more and more students are going to need to turn to borrowed money to finance their degrees absent a radical restructuring of the postsecondary education system.

* Assistant Professor of Law, University of Michigan Law School. Thanks to Stephanie Ben-Ishai, Rich Friedman, Sir Roy Goode, Reshma Jagsi, Elizabeth Warren, Jim White and Jacob Ziegel for comments and Rita Abro, Trevor Broad, Mike Murphy and Elizabeth Nestor Haas for research. This paper was developed from a presentation to the 35th Annual Commercial and Consumer Law Workshop, held at the University of Toronto Faculty of Law, October 2005; participants there were most helpful too.

1. See United States General Accounting Office, Report to the Secretary of Education, Federal Student Aid: Timely Performance Plans and Reports Would Help Guide and Assess Achievement of Default Management Goals (GAO-03-348, February 2003), online at http://www.gao.gov/htext/d03348.html.

2. See Trends in College Pricing (CollegeBoard, 2005), online at http://www.collegeboard.com/prod_downloads/press/cost05/trends_college_pricing_05.pdf (adding that while there were relatively large tuition increases at public four-year institutions in the early 1980s and again in the early 1990s, the rate of increase has grown even higher in the early 2000s).

3. See U.S. Census Bureau, Current Population Survey, Annual Social and Economic Table P 36, Full-Time, Year-Round All Workers by Median Income and Sex: 1955online at http://www.census.gov/hhes/www/income/histinc/p36ar.html. For a critique of the regressive effects wage stagnation has wrought on the entry of both spouses into the workforce, see Elizabeth Warren and Amelia Warren Tyagi, The Two Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke (New York, Basic Books, 2003), especially at pp. 49-53.

245 246 Canadian Business Law Journal [Vol. 44 Policymakers have paid increasing attention to the problems and issues surrounding these student loans. Just recently, the U.S.

Congress decided to cut funding to government-funded student loan programmes to help balance the federal budget deficit.4 But what has been largely unexamined in legal literature is the treatment of student loan debt in personal bankruptcy proceedings.5 This is so even as a 2005 overhaul to the consumer bankruptcy laws in the United States added yet another amendment to the student loan dischargeability provisions.6 Currently, the U.S. Bankruptcy Code gives student debt the extraordinary treatment of nondischargeability.7 This means that unlike all other unsecured debts, student loans do not get discharged in a debtor’s bankruptcy proceeding. They survive a filing and continue to haunt the debtor in his post-bankruptcy life (“staling” his otherwise “fresh” start). This is harsh and dramatic treatment, and it is worthy of scholarly attention. This article assembles the various theories under which student loans could be treated as nondischargeable in bankruptcy and then subjects them to scrutiny.

It proceeds as follows. Part II recaps the current U.S. law on student loan treatment in bankruptcy and its convoluted legislative history.

Part III presents six possible theories for treating student loans as nondischargeable debts in bankruptcy (Fraud, Soft Fraud, Internalization, Shaming, Public Fisc, and Cost of Private Capital).

Part IV offers a critique of how current law comports with each of these theories, and how these theories in turn sit with available empirical data. It concludes by recommending an incomecontingent approach similar to the debt relief programmes used by several high-tuition law schools in the United States.8

4. See Anne Marie Chaker, “Congress Cuts Funding for Student Loans”, Wall Street Journal, December 22, 2005, at p. D1 (chronicling five-year reduction of $12.7 billion to federal student loans and raising of federal interest rates on student loans).

5. This is not to say that nothing has been written. Much has, but the focus has been doctrinal. See, e.g., Robert F. Salvin, “Student Loans, Bankruptcy, and the Fresh Start Policy: Must Debtors Be Impoverished to Discharge Educational Loans?” (1996), 71 Tul. L. Rev. 139. One thoughtful compilation is Richard Fossey and Mark Bateman, eds., Condemning Students to Debt: College Loans and Public Policy (New York, Teachers College Press, 1998).

6. See Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No.

109-8, 119 Stat. 23 (2005) (codified as amended in sections of 11 U.S.C.).

7. See 11 U.S.C. § 523(a)(8) (2005).

8. My own law institution, the University of Michigan, has such a programme. It relieves loan payback for students earning less than $36,000 annually. For more information, see the explanation online at http://www.law.umich.edu/currenstudents/ financialaid/debt-management.htm.

2006] Nondischargeability of Student Loans 247 Part of the inspiration for this article is the comparative study on post-secondary education financing being undertaken by Canadian researchers Stephanie Ben-Ishai, Iain Ramsey, and Saul Schwartz (“Ben-Ishai”).9 Their project is an analysis of public student loan assistance programmes, including their forgiveness regimes, and

the treatment of student loans in bankruptcy in five countries:

Canada, the United States, the United Kingdom, Australia and New Zealand. Indeed, the recommendation that the most compelling treatment of student loans would involve an income-contingent approach builds on the regime used in New Zealand (and other countries).

II. THE U.S. LAW AND HISTORY The U.S. federal government has a comprehensive system of directly funded and federally guaranteed (both “subsidized” and “unsubsidized”) student loans, complete with programmes for forbearance, deferral and other forms of within-programme relief.10 Of more familiarity to those focused on bankruptcy law is the U.S.

Bankruptcy Code’s nondischargeability provision (or what might be termed “conditional dischargeability” provision) of 11 U.S.C.

§ 523(a)(8).

In their most recent listing, freshly revised in October 2005, nondischargeable debts now include:

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for — (A) (i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or (ii) any obligation to repay funds received as an educational benefit, scholarship, or stipend, or (B) any other educational loan that is a qualified education expense, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.11

9. Stephanie Ben-Ishai, “Government Student Loans, Government Debts and Bankruptcy: A Comparative Study” (2006), 44 C.B.L.J. 211. Ben-Ishai offers some bankruptcy theory in the background discussion of the most recent publication of her project’s findings, but the study’s focus is chiefly comparative. See ibid. My analysis, unfettered by a grant mandate, has the luxury of being able to explore theoretical considerations in more depth.

10. See the Ben-Ishai Appendix, unpublished in this issue but on file with the author, for a helpful summary.

11. 11 U.S.C. § 523(a)(8) (2005). The major change of the 2005 amendments was to encompass all student loans (see 11 U.S.C. § 523(a)(8)(B) (2005)), not just student 248 Canadian Business Law Journal [Vol. 44 The history of how student loans became non-dischargeable debt under the U.S. Bankruptcy Code is complex and ongoing. After the Guaranteed Student Loan Program was established under the Higher Education Act of 1965, perceived over-use of bankruptcy to discharge government loans led to § 439A of the Education Amendments of 1976. Section 439A prohibited student loan discharge in bankruptcy until five years had passed after the start of the repayment period of the loan, except in cases constituting “undue hardship”.12 In the comprehensive overhaul of the U.S.

Bankruptcy Code enacted in 1978, that treatment of student loans then became addressed under the bankruptcy laws, specifically § 523(a)(8).13 The full legislative history to § 523(a)(8) (and 439A) is chronicled in Pardo and Lacey’s analysis of 261 student loan discharge motions in reported bankruptcy cases, and so the reader seeking more historical detail is referred there.14 What is probably most important to glean is that these nondischargeability provisions came up at the last minute over the opposition of key legislators.

Both the primary co-sponsor of the 1978 Bankruptcy Code (Rep.

Don Edwards) and the Chairman of the House Subcommittee on Postsecondary Education who oversaw the Education Amendments of 1976 (Rep. James O’Hara) objected to the introduction of a student loan nondischargeability rule.15 O’Hara protested bitterly that Congress was “fighting a ‘scandal’ which exists primarily in the imagination” and that the amendment “treats educational loans precisely as the law now treats loans incurred by fraud, felony, and alimonydodging”.16 As a partial victory for Edwards, the nondischargeability loans made, insured or guaranteed by the government. Note that the curious diction “debtor and the debtor’s dependents” could raise an argument (although it has never been seriously embraced by the courts) that relief is available only to a debtor who has dependents.

12. See Education Amendments of 1976, Pub. L. No. 94-482, 90 Stat. 2081, 2141 (codified at 20 U.S.C. § 1087-3 (1976 (repealed 1978)) (hereafter “Education Amendments of 1976”).

13. See Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, § 316, 92 Stat. 2549, 2678 (effective October 1, 1979).

14. Rafael I. Pardo and Michelle R. Lacey, “Undue Hardship in the Bankruptcy Courts:

An Empirical Assessment of the Discharge of Educational Debt” (2005), 74 Cin. L.

Rev. 405 (analyzing 286 generated discharge determinations).

15. See ibid., at pp. 419-28 for a more detailed historical discussion of the “long and tortured” legislative history of 11 U.S.C. § 523(a)(8). Ibid., at p. 421 (quoting Mallinckrodt v. Chem. Bank (In re Mallinckrodt), 260 B.R. 892, 897 (Bankr. S.D. Fla.

2001), revd 270 B.R. 560 (S.D. Fla. 2002)).

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