Lessening the Burden of Student Loan Debt Through Mediation & Negotiation

Tom Donadio

As of 2019, a staggering 1.5 trillion dollars in student loan debt loan debt currently looms over individuals all over the United States. [1] Individuals in their twenties are less financially independent now than in the 1980s. For years society considered getting an education the first step in ensuring a secure financial future. But now, with the additional financial burden of student loan payments, many college-educated adults are forced to declare bankruptcy.[2] Consequently, staples of middle-class identity, such as home ownership, financial self-sufficiency, and retirement are delayed for indebted individuals and families.[3] Another impact of the debt crisis is the intermingling of finances between young adults and their parents.[4] Arguably this monetizes the family dynamics and creates an additional layer of stress for those seeking higher education.[5]

Unsurprisingly, the value of a college education is being questioned as the cost of college has significantly increased in the past decade.[6] For example, Apple CEO Tim cook asserts that there is a mismatch between the modern economy’s needs and the skills being taught at most universities.[7] Similarly, Oren Cass, a senior fellow at the Manhattan Institute, decries the billions of dollars the federal government spends on promoting higher education while essentially ignoring vocation educational programs.[8] The prevailing culture encouraging all students to go to college regardless of their individual compentencies encourages those who are less likely to graduate to take on considerable debt with little to no financial return.[9] While these cultural shifts have yet to occur, legal interventions are currently attempting to address student loan debt.

Student loan debt, unlike many other forms of debt, is rarely dischargeable in bankruptcy proceedings [10] Instead, § 523(a)(8)(B) of the Bankruptcy Code dictates that student loans are dischargeable when the debtor faces “undue hardship” in repayment.[11]  The majority of judicial circuits use a three-part test to assess undue hardship which includes: (1) the debtor’s inability to maintain a minimal standard of living if forced to repay the loans; (2) the existence of circumstances preventing repayment during the repayment period; and (3) the debtor’s good-faith effort at repayment. [12] A minority of courts look to the totality of the circumstances surrounding the repayment, an objective poverty test, or the underlying policy of the Bankruptcy Code.[13]

Aisha Al Muslim of the Wall Street Journal explores what some bankruptcy courts are doing to address student debt, which may be yet another financial bubble ready to burst.[14] The  United States  Courts for the Southern District of New York (“S.D.N.Y.”) and the Middle District of Florida (“M.D. Fla.”) have ushered in programs designed to facilitate communication between student borrowers and their lenders.[15] The S.D.N.Y. program is a court-supervised mediation process which allows the parties to discuss repayment options as an alternative to litigation.[16] The program is open to any borrower who has student loan debt and is involved in a bankruptcy a case pending within the district. This program is modeled off of mortgage loss mediation programs that were created in the wake of the Great Recession.[17] This initiative is unique because The M.D. Fla is similarly developing novel programs to address the student loan debt crisis. In that district, the court has capped attorney’s fees at $1,000 in cases where a party is seeking assistance with a loan modification application. In comparison, without these capped fees, a party would typically pay upwards of $10,000 in attorney’s fees to litigate the issue.[18]

The S.D.N.Y. and M.D. Fla. programs, while created with communication and transparency in mind, are still somewhat controversial initiatives.[19] The founder of StudentLoanJustice.org, an organization advocating for extensive changes for student loans, criticized the judicial programs as another layer of bureaucracy.[20] Another weakness in these reforms is that they almost entirely depend on the lenders’ willingness to negotiate.[21]

As judges across the country grow more sympathetic to student borrowers[22], this trend begs the question of whether the legislature is a more appropriate institution to address the issue of student debt? In one sense, the bankruptcy judges are exercising their discretion and addressing a serious public policy issue before them.  Alternatively, courts are reactive in nature and traditionally are not the branch entrusted with policymaking. Federal judges are unelected officials which poses democratic accountability issues. While the student debt debate continues, Congress should consider setting lower interest rates for student loans. Creditors are entitled to a return on their loans but should not be grossly enriched off of higher education. Furthermore, Cook and Cass are correct in that a cultural shift needs to occur. Not everyone is suited for college and trades that are critical to society, such as plumbing or electric maintenance, should be treated as such by lawmakers. Lastly, in the current market, student borrowers need to be informed consumers and think critically when choosing an area of study and which institution to attend, if at all. There is likely no quick fix to the student loan crisis but a multifaceted solution involving judicial, legislative, and societal action will be necessary.

[1] Hua Hsu, Student Debt is Transforming the American Family, New Yorker (Sept. 2, 2019), https://www.newyorker.com/magazine/2019/09/09/student-debt-is-transforming-the-american-family.

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Id.; National Center for Education Statistics, NCES.ed.gov (last accessed March. 3, 2020) (citing that “between 2006-07 and 2016-017, prices for undergraduate tuitions, fees, room, and board at public institutions rose 31 percent, and price at private nonprofit institutions rose 24 percent, after adjustment for inflation.”).

[7] Hsu, supra note 1.

[8] Oren Cass, The Misguided Priorities of Our Educational System, The N.Y. Times (Dec. 10, 2018), https://www.nytimes.com/2018/12/10/opinion/college-vocational-education-students.html .

[9] Id.

[10] Id.

[11] Ann Wooster, Discharge of Student Loan on Ground of Undue Hardship, 62 A.L.R. Fed. 2d 545 (2012).

[12] Id.

[13] Id.

[14] Aisha-Al Muslim, Top New York Bankruptcy Judge Pushes Mediation for Student Loans, Wall St. J. (Jan. 28, 2020), https://www.wsj.com/articles/top-new-york-bankruptcy-judge-pushes-mediation-for-student-loans-11580244971.

[15] Id.

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Id. (describing how S.D.N.Y. Chief Judge Morris excused a U.S. Navy Veteran’s more than $200,000 in student loan debt).