Supreme Court May Need An Amicus Brief on Income-Based Repayment

According to a report from Bloomberg, the United States Supreme Court may take up a case on whether federal student loans should have more lenient bankruptcy provisions. The plaintiff is 57-year-old Mark Tetzlaff. Here’s a description of the would be plaintiff from Bloomberg:

The Wisconsinite accumulated $260,000 in student debt after getting an MBA at Marquette University; then attending, but not graduating from, law school at DePaul University; and finally finishing his law degree at the for-profit Florida Coastal School of Law. He failed the bar exam twice. He has been out of work since 2004 and says he cannot get employed anywhere because employers repeatedly reject him on the basis of his criminal record. He now lives with his 86-year-old mother, and the two survive on her Social Security income.

It seems fair to say Tetzlaff’s life has not gone according to plan. He is partially a victim of a federal student aid system (these are all federal loans) that issues tremendous amounts of money to anyone wanting to attend a graduate school that is accredited. Tetzlaff’s decision to borrow loans to attend both an MBA program and a law program turns out, in retrospect, to have not been a good bet. His lawyers are now arguing, according to Bloomberg, that Tetzlaff should get a “fresh start,” and that the court needs to use a more lenient definition of hardship (Totality of Circumstances) rather than the stricter standard (the Brunner test) that has been applied in the lower court rulings. Using the Brunner standard, the lower courts ruled against Tetzlaff.

[pullquote]Why can’t he just use IBR?[/pullquote]

These bankruptcy provisions go back to 1970’s statute, and when Congress has revisited the issue, it has tended to make dischargeability more difficult. But at the same time, Congress has also worked to make bankruptcy less relevant, by layering on other provisions, most notably Income-Based Repayment (IBR).

Under IBR, Tetzlaff owes 15 percent of any income he earns above $17,655, and will have his loans forgiven after 25 years. Since he’s not working, he has no income and therefore his monthly payment would be zero.

Because he won’t have to make a monthly payment now, and because his lawyers say his income will continue to be zero and therefore he won’t have to make payments in the future, he should fail the first prong of both of the hardship tests.

In its decision, the 7^th Circuit Court of Appeals, which ultimately ruled against Tetzlaff, erroneously argues that he passed the first prong of the Brunner test, which asks whether Tetzlaff “cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for himself and his dependents if forced to repay his loans.” Under IBR, which the appellate court never mentions, Tetzlaff certainly fails that provision. This is why the Supreme Court, should it take up the case, needs to be made aware of Income-Based Repayment. Tetzlaff, and almost all other borrowers, would always be able to “repay” under IBR. As a result, there’s no clear reason why the court needs to make the undue hardship clauses looser.

With IBR in place, when is there ever an argument for more lenient bankruptcy provisions for federal student loans? Medical debt, maybe? The Department of Education considered this in a “Dear Colleague” letter from July. They use a hypothetical example of a woman who takes on debt to earn a Master’s degree, whose child subsequently gets very sick such she must take care of the child most of the time, with no spouse, holding down a low-paying part-time job, while she attempts to pay for her child’s expensive medical bills.

Even then, the Department states that this “warrant[s] exploring some of the income-driven repayment options” and only if that doesn’t alleviate hardship, should she have her loans discharged (with a dependent and low-income, she would likely owe a zero dollars per month).

This too would be a different discussion were Tetzlaff arguing he should be able to discharge his private student loans. Those have no IBR provisions, and in that case his hardship arguments may apply.

Given his argument and the available facts, it’s just not clear how IBR isn’t enough.”