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A Push to Make it Easier to Escape Student Debt Hits Snags

The government may have just won a crucial victory against a bankrupt borrower

An effort to open a new path for graduates with student debt to get relief appeared to hit a snag in federal court on Thursday. During about an hour of oral arguments, the panel judges in the case of Robert Murphy vs. U.S. Department of Education questioned the wisdom of revising the harsh standards used to decide whether a borrower can wipe out their loan after declaring bankruptcy. 

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Murphy, a bankrupt 65-year-old with hundreds of thousands of dollars in student loans, has been fighting for three years to get his loans erased. A ruling in Murphy’s favor could make it slightly easier for the most destitute student borrowers in America to get a reprieve on their college loans, by setting more lenient criteria for wiping out the debt in bankruptcy.

Sandra Lynch, one of three judges on the panel, seemed skeptical of Murphy’s argument—that he had been held to an unfair standard for discharging his debt by lower courts—and began peppering his lawyer with questions within the first 30 seconds of his five-minute testimony.

At one point, Lynch raised the fact that another borrower recently appealed a similar loan case to the Supreme Court. The First Circuit federal court is one rung below the Supreme Court, and must abide by its rulings. The other two judges seemed more sympathetic to Murphy. Disagreement among the judges could potentially lead to a split decision.  

The case turns on a phrase that seems straightforward, but has beguiled courts for more than a decades Every form of consumer debt besides college loans can be canceled after people go bankrupt, without much of a procedural fuss. Education debt is different: congress said in the 1970s that it can only go away if a debtor can prove that repaying it would impose an “undue hardship.” 

Murphy has said that repaying his $246,500 in debt – taken out to finance his three children’s education – would make his life uncomfortable, if not unlivable. He and his wife have been living on her salary as a teacher’s aide, which amounts to about $13,200 in income per year. His home is worth less than his mortgage, and has been foreclosed on. In the 13 years since losing his job running a manufacturing company, Murphy says he has been unable to find work.

The two other judges on the panel seemed convinced that his situation was sufficiently hopeless to merit relief. 

“If this doesn’t constitute undue hardship, what would?” asked Judge Ojetta Rogeriee Thompson, one of the judges, summarizing an earlier question posed by Judge Juan Torruela.

Lawyers for the government have spent years responding to that question. Since the 1970s, attorneys representing the Education Department have worked to ensure that the legal definition of undue hardship is as strict as possible. The logic, articulated in court on Thursday, is that students make a bargain when they take out federal loans: they get to go to college and pay the government relatively low interest rates. In exchange, they must be required to pay every cent they possibly can to clear the debt.

Congress wanted it to be nearly impossible to get rid of student debt to ensure “that borrowers do not use bankruptcy as an expedient means of freeing themselves from an obligation to repay the funds used to finance their own or their children’s education,” the Education Department said in a recent filing.  

That has made circumstances bleak for people who took out student loans and later found themselves in a financial meltdown. Now, a debtor who wants their student loans wiped away in bankruptcy has to show that their entire lives will be characterized by a “certainty of hopelessness,” or “total incapacity,” or, in one court’s telling, that repaying the debt would “strip [the debtor] of all that makes life worth living.”

Murphy has been asked to show that his bad fortune was caused by “truly exceptional circumstances,” like an illness, or having “an unusually large number of dependents,” according to court filings.

Two of the judges asked whether federal repayment plans are essentially replacing the option of bankruptcy for student debtors. Obama has expanded programs where students can make loan payments based on their income, helping people with low salaries. Lynch and Thompson encouraged lawyers on the government’s side to say whether that option made it impossible for a debtor to ever prove that repaying loans would be unduly hard.

Jeffrey Clair, the lawyer for the Education Department at the hearing, said that the problem with bankruptcy protection was that it made loans go away forever. With income-based plans, there’s always the possibility that a borrower could turn a corner, and start paying the government back.

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