As student debt crushes recent grads, some judges seek to provide relief

Since Lexington-based bankruptcy attorney Lex Rogerson began practicing law 40 years ago, not a single one of his clients has had their students loans discharged under the current system.

Unlike debt from credit cards, mortgages or other loans, a combination of federal and case law makes it "a total nonstarter" to erase student loan debt in bankruptcy, Rogerson said.

That's been the case for decades. But as tuition continues to rise and the nation's total college loan debt approaches $1.5 trillion, indebted former students are finding increasing sympathy among bankruptcy judges, according to a recent Wall Street Journal report.

The Journal interviewed 50 current and former judges throughout the country who said either they or their colleagues searched for alternative ways to reduce debt, such as encouraging lawyers to take cases for free, erasing interest payments — or in very rare cases, erasing a student's entire debt.

"Bankruptcy courts are seeing more and more cases with student loan debt... so you're seeing judges speak out," said U.S. Bankruptcy Court Judge John Waites in South Carolina. "Bankruptcy laws and student loans need to be updated."

Waites said he usually deals with bankruptcy cases in which debt payments are restructured, not those in which debtors ask for their debts to be erased. Even so, he said U.S. Department of Education policies make it difficult for people to repay student loans after they have restructured their debt payments.

"Clearly, their guidelines should accommodate someone who is in bankruptcy and wants to timely pay their debt," Waites said.

The Trump administration is considering making it easier for students to erase student loan debt through bankruptcy. The proposal is still in the early stages.

Despite the burgeoning student loan crisis and judges' increasing sympathy, a lasting solution is far off, Rogerson said.

"The Wall Street Journal is picking up on a trend, but it's a very early trend," Rogerson. "The changes have been marginal and incremental up until this point."

Nationwide, 44 million people leave school with an average of $37,712 of debt per student, and 11 percent of them default, studies show. The sheer amount of money students owe is part of the reason the student loan bubble affects even those who never borrowed a dollar, said Ron Peterson, a Chicago-based bankruptcy trustee who sits on the board of trustees at Ripon College in Wisconsin.

"If this bubble breaks, one thing you could see is the failure of colleges," Peterson said. "I doubt the University of South Carolina is going to fold its tent, but the private schools are in trouble."

USC alumni tend to be on better financial footing than the average college graduate, spokesman Wes Hickman said.

"Nearly half of USC students graduate with zero debt. Of the half who do, the average debt is about $29,000, which is less than the state and national average of all graduates," Hickman wrote in an email. "In South Carolina, four-year degree holders make on average about $20,000 more per year than those with a high school diploma ... In short, a college degree provides a good return on investment."

For every $1,000 someone has in student loan debt, homeownership rates for those in their mid-20s decreases by 1.5 percent, according to a 2017 study from the Federal Reserve. With the average amount of student loan debt increasing $20,000 in 13 years, experts say that creates issues for the economy.

“Student loan debt is a real problem — particularly in South Carolina, as multiple studies have shown," Jeff Schilz, interim executive director of the S.C. Commission on Higher Education, the state's college oversight body, said in an email. "Not only is the average amount owed by South Carolina students high, but a lot of these students, and their families, don’t realize the extent to which taking on this much debt can impact their life choices for years to come."

'Undue hardship'

Since 1976, Congress and appeals courts have applied a nearly impossible standard to erasing student debt from public loans. In 2005, Congress expanded those protections to private loans.

At the time, that made sense, Rogerson said. Anyone can get a student loan, regardless of credit history or how well their intended career pays. And the loans are backed by the federal government, so if a borrower defaults, taxpayers eat the cost.

"It's a reasonable policy to treat student loans differently, but it is not a reasonable policy decision to say they follow you to the grave," Rogerson said.

To erase student loan debt in bankruptcy, the debtor has to show the loan is causing an "undue hardship" as defined by the Brunner Test, a standard developed in 1985 by a federal judge in New York. That standard requires a debtor to show he or she cannot pay the debt while maintaining a reasonable standard of living, that the debtor will not be able to pay off the debt anytime soon and that he or she has made a reasonable effort to pay the debt.

"What's bothering judges is this is too hard a test," said Robert Anderson, a Columbia-based bankruptcy trustee and S.C. Supreme Court-certified bankruptcy law specialist. "They're finding some ways to give people relief, because everybody realizes the statute is too tough. But the statute is decisive."

The Brunner Test has been applied so many times, it would take a U.S. appeals court decision, a U.S. Supreme Court decision or an act of Congress to fix the system, Rogerson said.

However, that isn't stopping local bankruptcy lawyers, such as Columbia bankruptcy attorney Ben Matthews, from trying to find the case that pokes holes in Brunner.

"I'm encouraged by Judge Waites' comments, that he might reduce the burden, that he might say 'let's see what the appeals court says about this,'" Matthews said. "We know the judge has recognized a problem. It's just a matter of how to deal with it."

A remedy could mean more flexibility for students who rack up significant debt, Matthews said.

"If we get some good decisions, we don't have to sue every time," Matthews said. "Right now, the student loan (lenders) have no need to negotiate over this ... current law, as is, (says) they win."