Student loan cancellation
This student loan borrower got $178,000 of student loan cancellation against Navient.
Here’s what you need to know — and what it means for your student loans.
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Student Loans
A 68-year-old student loan borrower got $178,000 of student loan debt discharged in U.S. Bankruptcy Court in Maryland. Terry Randall owed more than $500,000 of student loans, including $190,000 to Navient, one of the nation’s largest student loan servicers. Despite having several degrees, Randall has been working for the past several years in a job that pays $13 an hour. According to Randall, after paying her living expenses and even working overtime, she doesn’t have enough money to pay student loans. Navient, the defendant, disagrees, and says Randall is capable of working and paying back at least some of her student loans. Randall argued to the Court that paying student loans created an undue financial hardship. So, Randall, a Chpater 7 debtor, filed an adversary proceeding (a lawsuit in bankruptcy court) to discharge her student loans under Section 523(a)(8) of the U.S. Bankruptcy Code. The Court ruled in Randall’s favor. Why?
Student loan cancellation is possible in court
There is a general presumption that student loans cannot be discharged in bankruptcy. The U.S. Bankruptcy Code treats student loans differently than other consumer debt such as credit cards or mortgages. However, it’s possible for a student loan borrower to overcome this presumption. When a court considers the possibility of discharging student loans, the court must examine all the evidence presented. For example, it’s insufficient simply to say that you can’t pay your student loans. In this case, the U.S. Bankruptcy Court applied a legal standard known as the Brunner test, which is the legal test in all circuit courts, except the 8th circuit and 1st circuit. Therefore, most student loan borrowers who seek student loan cancellation in bankruptcy must meet the Brunner test. The Court found that Randall satisfied all three prongs of the the Brunner test:
- the student loan borrower has extenuating circumstances creating a hardship;
- those circumstances are likely to continue for a term of the student loan; and
- the borrower has made good faith attempts to repay the student loan.
The Court found that it would be unreasonable to force Randall to work more than her current hours and overtime. Why? The Court found that even with additional hours, Randall owns no major assets, has been diligently trying to work, and doesn’t have excessive expenses. Interestingly, the Court did not grant Randall total student loan cancellation. Rather, the Court recognized that Randall could afford to pay back at least some of her student loans — namely $12,000 — which means that the Court granted partial student loan cancellation.
Another win for student loan cancellation, but has the burden to cancel student loans become more difficult?
This win for student loan cancellation comes at a critical time. Why? The U.S. Supreme Court recently declined to take a case involving student loans, bankruptcy and student loan cancellation. As a result, a ruling in a case in the U.S. Court of Appeals for the Second Circuit may make it harder for student loan borrowers to get student loan cancellation in bankruptcy. In Tingling, the Second Circuit — which is the same court that created the Brunner standard — affirmed the reasonability of the Brunner test and that there is a high burden to discharge student loans in bankruptcy. This has important legal implications because it signals to student loan borrowers that student loan cancellation is not easy to get. This is potentially bad news for student loan borrowers who hoped that the Second Circuit might relax its application of the Brunner test so that more student loan borrowers could get student loans discharged in bankruptcy.
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What this means for your student loans
Will your student loans get cancelled? Some student loan borrowers feel like student loan cancellation got cancelled and all hope has faded. Others say that student loan cancellation is alive and well, especially since President Joe Biden has now cancelled $3 billion of student loans since becoming president. The reality is it still possible to get student loans discharged in bankruptcy. In addition to Randall, a Navy veteran had $220,000 of his student loans discharged and a doctor got $430,000 of student loan cancellation. Still, this is different than the student loan cancellation most student loan borrowers are seeking: wide-scale student loan cancellation. Senate Majority Leader Chuck Schumer (D-NY) renewed his call this week for Biden to cancel $50,000 of student loans. However, new research shows that wide-scale student loan cancellation could disportionately benefit wealthier student loan borrowers. While there is no guarantee that there will be wide-scale student loan cancellation, student loan borrowers will get more than $90 billion of student loan cancellation when student loan relief ends on September 30, 2021. While it’s possible Biden could extend this student loan relief beyond September 30 — and provide more student loan cancellation of approximately $5 billion per month — Biden hasn’t made any announcement.
If you have student loans, make sure you understand all your options to pay off student loans. Before pursuing bankruptcy, consider these popular options first:
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