How the Government Polices What Student Debtors Spend

For borrowers seeking relief on their student loans in bankruptcy, there's no room for any spending seen as excessive.

Why It's So Hard to Get Rid of Student Debt

Tangerie Shells lost her only shot at life without debt when she decided to spend $175 per month on meals outside her home.

Shells, a social worker at Sacramento County’s department of children's protective services, supports her elderly mother, disabled husband, and three children. After she declared bankruptcy, she asked the court to forgive the $137,000 she owed in student loans because paying them, she said, would make it impossible to provide for five family members. 

“Shells cannot purposely choose to live a lifestyle that prevents her from repaying her student loans,” lawyers for the Department of Education wrote in court documents. The department attorneys suggested her $700-per-month food budget was too high. In all but the rarest circumstances, people who declare bankruptcy still have to repay their student debt. Shells was aiming to be one of those unique cases. The judge agreed that Shells spent too much on “nonessential items,” including the meals she didn't cook at home, and denied her relief in May. 

The government's scrutiny of Shells's cash flow was not an exception. For more than a decade, the Education Department has closely examined debtors’ basic expenses in its fight to prevent student borrowers from getting rid of their loans in bankruptcy. Now, as senators and judges pressure government lawyers to temper their pursuit of bankrupt borrowers, the Education Department is doubling down on its courtroom tactics. 

Education Department lawyers took issue with Shells's $567-per-month car payment. Shells contended that she needed a big car to fit the five people who depended on her and to get to work. When she made payments on her student loans, she said, she couldn’t scrounge together enough extra money to pay for “lights, gas, and water.” 

This month, lawyers for the Education Department intervened in the case of a man trying to wipe out his student loans in bankruptcy. The few cases in which student loans are eligible for discharge in bankruptcy must meet the nebulous threshold of presenting an "undue hardship" for the borrower to repay them. In Robert Murphy's appeal, the department urged the court to use the harshest standard possible in deciding what constituted undue hardship—and who deserves bankruptcy relief.  

In a July letter, the department told its loan servicers to scrutinize borrowers’ finances carefully.

Deputy Assistant Secretary Lynn Mahaffie wrote in the letter that “restaurant expenses,” “gym memberships,” and “‘name label’ clothing” should be considered “nonessential expenditures.” Mahaffie also wrote that having severely sick family members or having had cancer are not good reasons for someone to get debt relief. The point of considering expenses, Mahaffie said, is to figure out whether debtors are doing enough to keep their spending low in the interest of repaying the taxpayer-funded loans they received.

About a year earlier, a group of senators and congressmen sent a letter to the department demanding that it send the opposite message to debt collectors. They wrote that the department should be more vigilant about its own balance sheet and said that it was not “cost-effective” to pour resources into pursuing borrowers “who have demonstrated a clear and legitimate inability to repay their loans.” 

In some bankruptcy proceedings, courts will consider how much someone is spending, to figure out how much they can reasonably pay back their creditors in the future. But for student debt, the government has extra leverage. The Education Department can deny people bankruptcy altogether if its lawyers can show that debtors are spending too much on such things as fast food, cable television, or even their pension plans.

"When we focus so much on the minutia of each and every individual expense, it can become a distracting sideshow where we aren’t really answering the big picture question, which is, is there any ability to repay the amounts that are owed?" said Rafael Pardo, a law professor at Emory University.

Government lawyers are given license to do such meticulous accounting because of a quirk in bankruptcy law. Congress passed rules in the 1970s making it nearly impossible to get rid of student debt in bankruptcy and introduced the "undue hardship" exception without defining the term. It was left to courts to interpret the law. Most courts require debtors to prove that they can’t maintain a “minimal” standard of living while paying the debt back, and lawyers for the Education Department generally view any sign of excessive spending as an argument that debtors don't qualify.

Two cases that could make the process more lenient for borrowers are wending their way through the court system right now. In both cases, lawyers for the Education Department have been forceful about the need to keep the strictest standard on the books.

“The current standard invites this kind of thing,” said John Rao, a lawyer with the National Consumer Law Center. “You just have turned it into a reality show here, where you start exploring the lifestyle issues of consumers.”

For Shells, the social worker, the reality show did not end well. Government lawyers were unmoved by her claim that the money she spent on food and transportation was the minimum to support a family of six. “She has nothing more than ‘garden variety’ financial conditions,” the lawyers wrote.

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