Bankruptcy, Money, Student Loans

Supreme Court Tackles Student Loan Debt

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The Supreme Court ruled that a student’s failure to show undue hardship didn’t void a bankruptcy agreement to discharge student debt. It’s a minor victory for student debtors everywhere, and Justice Clarence Thomas did all he could to limit its effect.

The decision came down today in the case of United Student Aid Funds v. Espinosa. Justice Thomas, writing the opinion for a unanimous Court, ruled that a bankruptcy judge should have required trade school student Fransisco Espinoza to show undue hardship before approving the discharge of Espinosa’s student debt. But the error was not serious enough to void the agreement.

SCOTUSblog explains that the holding is very limited:

Today’s ruling in the student loan case is confined primarily to the situation where a discharge of such a debt has become final without the creditor using its option to challenge it at the time. It makes clear that bankruptcy courts may discharge a student loan debt only if they find it is an undue hardship to require payment.

Thomas’s language upholds the notion that undue hardship must be a part of the discharge of student debt …


Justice Thomas couldn’t have been more clear about what the bankruptcy court should have done. From the opinion:

Given the Code’s clear and self-executing requirement for an undue hardship determination, the Bankruptcy Court’s failure to find undue hardship before confirming Espinosa’s plan was a legal error. … But the order remains enforceable and binding on United because United had notice of the error and failed to objector timely appeal.

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Thomas argues that the bankruptcy court must address undue hardship even if the lender doesn’t ask for it:

Instead, §523(a)(8) requires a court to make a certain finding before confirming the discharge of a student loan debt. It is true, as we explained in Hood, that this requirement is “‘self-executing.’” Id., at 450.11 But that means only that the bankruptcy court must make an undue hardship finding even if the creditor does not request one; it does not mean that a bankruptcy court’s failure to make the finding renders its subsequent confirmation order void for purposes of Rule 60(b)(4).

All of which is to say that student deadbeats should keep the corks in their champagne (Cold Duck?) bottles. This is not the big victory that will allow students crushed into bankruptcy to get off of the hook with their educational debts.

But, it’s something. And it’s part of the increased pressure on Congress to do something about educational loans. On Sunday, Congress took a big stand against the banks. Claudia Deutsch reports on True/Slant:

[T]he House took another step toward sanity on Sunday, too: it passed a bill that would stop the long-standing — and expensively stupid — practice of paying banks to act as third parties in the granting of student loans.

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The move will allow the federal government to lend to students directly.

Let’s tie the room together. The best argument in favor of making undue hardship a requirement for discharging student debts through bankruptcy is that banks won’t lend students with little or poor credit history money without this extraordinary requirement. But if the government can lend directly, then perhaps the government would be willing to take on the increased risk of allowing students to get out from under their crushing debt obligations should the need arise.

Maybe you can’t expect the private market to take on the risk. But if the government is really serious about education being so important, why can’t they take that risk?

Supreme Court Rules for Student Seeking Discharge of Loan Debt [ABA Journal]
Today’s opinion [SCOTUSblog]
Sanity Takes Hold With Students Loans [True/Slant]

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