Student loan cancellation, The U.S. Supreme Court
The U.S. Supreme Court denied a student loan borrower’s petition for certiori to get student loan cancellation.
Here’s what you need to know—and what it means for your student loans.
Student Loans
A student loan borrower, Thelma McCoy, petitioned the Court to have nearly $350,000 of student loans discharged after the 5th U.S. Circuit Court of Appeals ruled that her student loans could not be discharged in bankruptcy. McCoy borrowed $175,000 of student loans to earn a college degree, master’s and Ph.D. While earning her Ph.D., McCoy sustained personal injuries and said she could not find employment due to her disabilities. McCoy argued that paying student loans created an undue financial hardship. Unable to pay her student loans, McCoy filed for Chapter 7 bankruptcy in federal court in Texas to discharge her student loans, which had grown with interest to $350,000. However, McCoy did not get student loan cancellation. Why?
Student loan cancellation denied
McCoy raised an interesting legal point in her petition: that the U.S. Supreme Court should clarify which legal standard to apply to student loan cancellation as it relates to bankruptcy. For example, there are two primary legal standards that circuit courts apply to determine if a student loan borrower can discharge student loans in bankruptcy. The first legal test is called the Brunner test, which is the legal test in all circuit courts, except the 8th circuit and 1st circuit. The 8th circuit applies a second legal test, a totality of circumstances, which is similar to Brunner, while the 1st circuit has yet to declare a standard. McCoy argued that the U.S. Supreme Court should clarify which standard courts should apply. Why? Otherwise, without universal application, different courts may interpret the law differently, which can lead to disparate outcomes.
Student loan cancellation: The Brunner Test
Unlike a mortgage or credit card debt, student loan debt is not typically dischargeable in bankruptcy. However, it is possible to get student loan forgiveness if a student loan borrower can demonstrate an undue financial hardship. For example, most student loan borrowers who seek student loan cancellation in bankruptcy must meet the Brunner test. To discharge student loans through bankruptcy, an Adversary Proceeding (a lawsuit within bankruptcy court) must be filed, and a debtor would argue that paying student loan debt would create an undue hardship for the debtor. The Brunner standard says:
- 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 Bankruptcy Court found that McCoy did not meet the second prong of the Brunner test. The U.S. District Court for the Southern District of Texas and the 5th Circuit both affirmed. Why? The court found that McCoy’s health issues mostly occurred before she borrowed most of her student loans and her health issues didn’t impact her ability to complete her education or find employment.
Major setback for student loan cancellation?
Is this a major setback for student loan cancellation? No. This was a specific case involving one particular student loan borrower. However, the U.S. Court of Appeals for the Second Circuit issued a ruling April that could make it more difficult to discharge student loans in bankruptcy. In Tingling, the Second Circuit — which is the same court that created the Brunner standard — affirmed 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 requires a high bar. While other circuit courts don’t have to adopt this same approach, the Second Circuit reaffirmed that the Brunner test is reasonable, even if the burden is high. 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.
What this means for your student loans
Will you get student loan cancellation? The U.S. Supreme Court denied certiori, which means that the Court chose not to hear McCoy’s case. The Court did not rule on the merits of the case. Practically, this means that the Brunner Test and the totality of the circumstances will coninue to be applied in their respective circuit courts. While McCoy argued there are major differences between the standards which has created disparate application and outcomes, the federal government argued that the differences are relatively minor. It’s still possible to get student loan cancellation in bankruptcy. For example, a Navy veteran had $220,000 of his student loans discharged and a doctor got $430,000 of student loan cancellation. However, if you are considering student loan cancellation in bankruptcy, the facts of your specific case and circumstances may determine the outcome. Finally, Congress can amend the U.S. Bankruptcy Code to help more student loan borrowers get student loan forgiveness. To date, that has not happened, but there is bipartisan support to help student loan borrowers get more student loan relief through bankruptcy.
Bankruptcy is typically a last option for student loan borrowers, and there are several important considerations. If you have student loans, make sure you understand all your options to pay off student loans. Consider these popular options first:
