By Sara P. Connolly
INTRODUCTION
Student loan debt is an increasing burden for Americans of all ages, but it presents unique challenges to older adults as they approach and enter their retirement years.1 Carrying student loan debt later in life has both direct and indirect impacts on the economic security of older Americans.2 Whether assumed on behalf of oneself or to assist one’s child, student loan debt can reduce contribution rates to retirement savings.3 This trend is particularly problematic given the shift in retirement funding and associated risk-bearing from employers to employees that has occurred in the past forty years.4 During their retirement years, older adults typically have fixed incomes and limited ability to meet monthly debt obligations by working more.5 Moreover, when an older adult loses their job, it often takes them longer to find a new position when compared with a younger person in similar circumstances.6 Furthermore, higher levels of financial insecurity are related to increased psychological stress which may, in turn, lead to diminished physical health.7
Student loan debt can also have a direct impact on retirement income, as borrowers who default on federal student loans may be subject to administrative offsets which include garnishment of up to fifteen percent of their Social Security benefits.8 The number of people whose Social Security benefits were offset to pay off a defaulted federal student loan more than quadrupled between 2005 and 2015.9
This paper proceeds as follows. Part I provides an overview of the demographic and economic shifts contributing to the rise in student loan debt among older Americans. Part II examines the dischargeability of student loans in bankruptcy and the implications of such provisions for older adults and those approaching their retirement years. In Part III, I recommend revisions to the bankruptcy provisions for discharge of student loan debt with a focus on those revisions that would benefit older Americans.
PART I - OVERVIEW
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Demographic Shifts and the Graying of America
The number of older Americans is increasing faster than the growth in the population as a whole and the proportion of older adults within the population is increasing as well.10 According to the U.S. Census Bureau, in 2020, there were an estimated 56.1 million Americans aged sixty-five and older, representing 16.9% of the population.11 By 2040, the Bureau projects that there will be 80.8 million people aged sixty-five and older, constituting 21.6% of the U.S. population.12 By 2060, the Bureau estimates that nearly one in four Americans will be sixty-five and older, the number of people aged eighty-five and above will triple, and the country will add a half million centenarians.13 Furthermore, in 2034 the United States will reach a new milestone as the number of Americans over the age of sixty-five (77 million) will surpass the number of children under the age of eighteen (76.5 million).14
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Household Debt Among Older Americans
The amount of household debt held by older Americans grew substantially from 1989 to 2016 and grew faster than debt among younger households.15 The average household debt nearly doubled for households in age groups younger than sixty, but it increased by about four times for the age groups sixty to sixty four, sixty five to sixty nine, and seventy to seventy four; by about seven times for the age group seventy five to seventy nine; and by more than ten times for the age group eighty and older.16
While the share of older households holding any debt generally trended upward from 1989 to 2016, the median and average debt peaked in 2010, the year after the 2007-2009 economic recession, and declined from 2010 to 2016.17 The median debt among households headed by individuals over the age of sixty-five increased from $7,463 to $31,050 (in 2016 dollars) and the real average debt increased from $29,918 to $86,797 (in 2016 dollars).18 The leverage ratio is a measure of debt stress which compares debts to assets and is frequently used to assess the ability of a household to incur additional debt.19 The median leverage ratio for older households almost doubled between 1989 and 2010 from 8.7% to 16.7% before declining to 12.4% in 2016. 20 Sources of debt among older adults are similar to those of younger borrowers: mortgages, automotive loans, credit card debt, and student loan debt.21
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Student Loan Debt Among Older Americans
Student loans are the second largest category of consumer debt after mortgages, and greater than debt from credit cards or auto loans.22 At the end of the first quarter of 2020, Americans owed $1.5 trillion in outstanding federal student loan debt.23 Over twenty-two percent of this debt, or $341 billion is held by people aged fifty and older.24 Within this cohort, 6.1 million Americans aged fifty to sixty one owe $256.1 billion of student loan debt and 2.2 million people over the age of sixty two hold $83.8 billion.25
The number of consumers aged sixty and older with outstanding student loan debt quadrupled from 2005 to 2015, increasing from about 700,000 to 2.8 million.26 In addition, a greater proportion of the population age sixty and older held student loan debt in 2015 than in 2005.27 In 2005, approximately 700,000 student loan borrowers aged sixty and older represented 1.4% of the 47.8 million adults aged sixty and older in the United States. In 2015, an estimated 2.8 million student loan borrowers aged sixty and older represented 4.2% of the 67 million adults aged sixty and older.28
The proportion of delinquent student loan debt held by older adults has also increased over time.29 The share of student loan debt delinquent by ninety days or more for older individuals aged fifty to seventy-nine rose to twelve percent in 2012, becoming the consumer debt type with the highest delinquency rate, and peaked at thirteen percent in 2018 and 2019.30
Older Americans take out student loans to finance both their own education and the education of their children.31 According to the Government Accountability Office (GAO), in 2015, of the 870,000 borrowers aged sixty-five and older who owed federal student loans, approximately 210,000 of these individuals also owed loans under the William D. Ford Direct Loan Program’s Parent PLUS Loan program.32 The PLUS loan program is the only federal program available to parents to borrow for the undergraduate education of their children.33
PART II - STUDENT LOAN DISCHARGEABILITY IN BANKRUPTCY AND IMPLICATIONS FOR OLDER ADULTS
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BANKRUPTCY AMONG OLDER AMERICANS
Older Americans are increasingly likely to file for personal bankruptcy.34 Data from the Consumer Bankruptcy Project suggest that the proportion of older filers within the population of bankruptcy filers is also increasing.35 In 1991, the proportion of bankruptcy filers aged sixty five and above was 2.1%.36 Between 2013 and 2016, that proportion had grown to 12.2% (approximately 97,600 households).37 This bankruptcy trend among older Americans is so significant that broader trends related to aging of the U.S. population can only explain a small portion of the increase observed in U.S. bankruptcy courts.38
Bankruptcy among older adults is particularly problematic because, unlike their younger counterparts, older Americans typically have fewer years left in full-time employment.39 As a result, they have a more difficult time recovering from financial collapse and are constrained in their ability to rebuild retirement accounts, pay off mortgages, or otherwise re-establish their financial security.40
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DISCHARGE OF STUDENT LOANS IN BANKRUPTCY
Declaring bankruptcy is one way in which an individual may potentially obtain relief from debts that they are unable to repay.41 Chapter 7 bankruptcy allows individuals to discharge unsecured debt such as medical debt, credit card bills, and unsecured personal loans.42 Some unsecured debts, such as student loans, alimony, taxes, and child support are non-dischargeable except under specific circumstances.43 For debts secured by collateral, such as a mortgage on a home or a car loan, the debtor must continue to make payments in order to be allowed to keep the property.44
Under most circumstances, qualified retirement savings accounts such as 401(k)s, 403(b)s, and IRAs are protected in a chapter 7 bankruptcy.45 Social Security benefits are not considered as income in the means test calculation for chapter 7 bankruptcy.46
The discharge of student loans in personal bankruptcy is governed by 11 U.S.C. § 523(a)(8) which provides:
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A discharge under 727 . . . of this title does not discharge an individual debtor for any debt -- . . .
8) unless excepting such debt from discharge under this paragraph would impose an undue hardship in the debtor and the debtor’s dependents, for --
(A)
(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or part by a governmental unit or nonprofit institution;47
Parents may take out loans to finance the undergraduate education of their children through the Department of Education’s William D. Ford Direct PLUS loan program, commonly known as Parent PLUS loans.48 A Direct PLUS loan cannot be transferred to the child and, as such, the parent borrower is legally responsible for repayment of the loan.49 Direct PLUS loans are treated as student loans incurred by the parent.50 The dischargeability standard for a student loan under Section 523(a)(8) also applies to Direct PLUS loans taken out by parents.51
Since adoption of Section 523(a)(8), the U.S. courts of appeals have applied different tests to determine “undue hardship”, a term which was not defined in the statute. The Eighth Circuit decision in Long v Educational Credit Management Corp. articulated a totality of the circumstances definition.52 In contrast, the First Circuit has declined to choose a specific test.53 The majority of courts have adopted the standard for “undue hardship” set forth by the Second Circuit in Brunner v. New York State Higher Education Services Corp.54
Brunner formulated a three-prong test for the analysis of “undue hardship” under which a chapter 7 debtor must demonstrate:
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that the debtor cannot maintain, based on current income and expenses, a minimal standard of living for herself and her dependents if forced to repay the loans;
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that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period for student loans;
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that the debtor has made good faith efforts to repay the loans.55
Since the Brunner test was conceived in 1987, most courts that use the test have interpreted it in a narrow manner.56 Moreover, several circuits have defined the second prong of the Brunner test to require debtors to demonstrate a “certainty of hopelessness” before being allowed to discharge their loans.57
Amendments to the Bankruptcy Code have made “undue hardship” the only way to discharge student loans in bankruptcy.58 At the time that the Bankruptcy Code was enacted in 1978, student loan debt could be discharged either if repayment would impose an “undue hardship” on the debtor and their dependents or after the passage of five years following the commencement of the repayment obligation.59 In 1990, the five-year waiting period was extended to seven years.60 Then in 1998, the Bankruptcy Code was amended to remove the waiting period altogether.61 The elimination of the waiting period was made despite the findings of the National Bankruptcy Review Commission which in its 1997 report recommended elimination of the hurdles to discharge under Section 523(a)(8) and that student loan debt should be treated like other unsecured debt.62
Narrow interpretation of the Brunner test, together with amendments to the Bankruptcy Code that eliminated the waiting period, have resulted in a situation in which it is very difficult, although not impossible, for debtors to discharge their student loans in bankruptcy.63 Moreover, the ongoing differentiation of tests to determine “undue hardship” amongst the circuit courts, as well as differences in the application of the Brunner test are a cause for concern for both academics and some judges.64 Indeed, some bankruptcy court judges have been critical of the application of the Brunner test and the “certainty of hopelessness” standard.65 From the plaintiff perspective, in 2020 a writ of certiorari was filed with the United States Supreme Court arguing that the circuit split related to the “undue hardship” standard is often outcome determinative.66 However, the petition for certiorari was denied.67
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Age as a factor in student loan discharge determinations
Bankruptcy courts have also differed in the way that they factor age into “undue hardship”. Some courts consider age as an “additional circumstance” under the second prong of the Brunner test while others have declined to do so.68
In 2017, the Court of Appeals for the Fifth Circuit affirmed the judgment of the bankruptcy court that a sixty two-year-old woman who had lost her job and borrowed $7,000 to attend community college did not meet her burden of showing that she was eligible to discharge her student loan debt.69 Applying the Brunner test, the court ruled that the debtor, who suffered from incurable diabetic neuropathy, had not worked in over three years, and had an income of under $200 per month had not met the second prong of the Brunner test, which required her to show that her condition prevented her from working and that her incapacity was likely to persist for a significant portion of the repayment period.70
Similarly, in the First Circuit, the District Court for the District of Massachusetts, applying a totality of the circumstances test, affirmed the bankruptcy court’s judgment that a debtor’s $202,000 student loan debt was non-dischargeable under 11 U.S.C. § 523(a)(8). The debtor was a sixty-three-year-old former manufacturing executive who had been out of work for over twelve years, had liquidated and exhausted his retirement accounts, and whose home was subject to foreclosure proceedings.71
In contrast, the Court of Appeals for the Ninth Circuit upheld a ruling by the circuit’s Bankruptcy Appellate Panel ruling that, among other factors, a fifty one-year-old debtor’s age indicated that the duration of her work life was limited and in so ruling, the court enumerated a non-exhaustive list of factors which may be considered in the “additional circumstances” determination of prong two of the Brunner test.72 This non-exhaustive list included, “(l)imited number of years remaining in work life to allow payment of the loan;” and “(a)ge or other factors that prevent retraining or relocation as a means for payment of the loan.”73
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Treatment of voluntary contributions to retirement savings under the Brunner test
Generally, most funds held in Employee Retirement Income Security Act (ERISA) retirement savings plans are exempt in a chapter 7 bankruptcy proceeding, however federal law caps the protected amount for some types of retirement accounts.74 In the event that a debtor withdraws money from a retirement plan, the federal exemptions no longer protect it.75 Treatment of voluntary contributions to retirement savings plans under the Brunner test is less clear-cut, as courts have split as to whether contributions to 401(k), 403(b), and similar ERISA plans should be excluded for the “minimal living standard” analysis of prong one of the Brunner test.76
Some courts have held that voluntary retirement contributions are not necessary to maintain a minimal standard of living and are, thus, an unnecessary expense for the purposes of the “undue hardship” determination.77 For example, in considering the circumstances of a forty-six-year-old debtor, a bankruptcy court in the Eleventh Circuit held that, “(t)he continued contribution by the Plaintiff’s wife to a voluntary 403(b) plan is not indicative of sufficient efforts to minimize expenses for the purposes of the Brunner test.”78 Similarly, in considering a forty three-year-old debtor who was a law school graduate, a bankruptcy court in the Second Circuit found that $462 per month contributions to the 401(k) plan of the debtor’s wife demonstrated, along with other non-essential expenses, that the couple had not made a concerted effort to minimize expenses under prong one of the Brunner test.79
Other courts have chosen to exercise discretion in deciding whether to allow 401(k) contributions as reasonably necessary expenses for the purposes of Section 523(a)(8).80 For example, in considering the expenses of a forty-year-old debtor, a bankruptcy court in the Ninth Circuit allowed that a voluntary retirement contribution of $210.98 per paycheck, amounting to seven percent of gross income, into a 401(k) account was “modest and reasonable” and did not constitute expenses beyond the minimal standard of living.81 Another Ninth Circuit court, considering a forty-year-old debtor with health problems found it, “reasonable and prudent that (the debtor) set aside a modest sum each month for her retirement needs,” and that “forcing (the debtor) to indefinitely forego contributions for her 401(k) plan seems shortsighted.”82
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Income-Driven Repayment Plans
The federal government offers four income-driven repayment (“IDR”) plans which may make repayment of student loans easier.83 Under IDR plans, the debtor makes payments of ten to twenty percent of their discretionary income for twenty to twenty-five years.84 At the end of the IDR plan any balance remaining on the loan is cancelled.85
At first glance, IDR plans appear to offer a solution for debtors struggling to repay their loans.86 However, possible consequences of IDR include negative amortization – loan balances that increase because payments are not enough to exceed the interest that is accumulating on the debt – and tax liability upon discharge because the forgiven debt is treated as income.87 In short, a student loan debtor could spend twenty to twenty five years in an IDR plan and at the end of the term the balance which is forgiven by the Department of Education would be treated as taxable income by the Internal Revenue Service (IRS) thus potentially creating a new, albeit smaller, debt to the IRS.88
For these reasons, among others, many courts have decided that lack of participation in IDR plans should not be considered dispositive in an “undue hardship” determination.89 Rather, it should be viewed as but one factor in a determination of whether the debtor has made a “good faith” effort to repay her loans.90
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Congressional Intent
The American bankruptcy system is fundamentally remedial in nature, as evidenced by Congress’s original intent to provide deserving debtors with a “fresh start.”91 The legislative history of the 1978 Bankruptcy Reform Act, the landmark legislation which created the Bankruptcy Code, makes frequent reference to the “fresh start” as an important bankruptcy policy.92 The Report of the Commission on the Bankruptcy Laws of the United States (1973) explains the purpose of the fresh start as deriving from two objectives: 1) alleviating hardship arising from unmanageable debt; and 2) enabling the debtor to participate more fully in the economy and society.93
The Supreme Court has also acknowledged the foundational nature of the fresh start, stating that, "the principal purpose of the Bankruptcy Code is to grant a fresh start to the honest but unfortunate debtor.”94
Courts that have considered the dischargeability of student loans have likewise referenced Congress’s intent to provide a fresh start to debtors through the bankruptcy process.
We do not believe . . . that Congress intended a fresh start under the Bankruptcy Code to mean that families must live at poverty level in order to repay educational loans. Where a family earns a modest income and the family budget, which shows no unnecessary or frivolous expenditures, is still unbalanced, a hardship exists from which a debtor may be discharged of his student loan obligations.95
Similarly, in the Third Circuit, a bankruptcy court held that, “(t)he fresh start, rehabilitative purpose of bankruptcy continues to exist, in a diluted form, inside the §523(a)(8) "undue hardship" discharge standard. It is "undue" and inconsistent with that policy to impose a lifetime yoke on bankruptcy debtors.”96
PART III – PROPOSED REFORMS TO THE UNDUE HARDSHIP TEST TARGETING THE PLIGHT OF OLDER AMERICANS
Some of the broadest proposals for reform to the “undue hardship” standard and the Brunner test recommend Congressional action to remove the differentiation between student loans and other types of unsecured consumer loans, thus allowing discharge of student loans in bankruptcy.97 Since such sweeping reform of the “undue hardship” standard is unlikely in today’s political climate, the recommendations below would provide relief to student loan debtors who are in the middle and later stages of life.98
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Adopt clear criteria for “undue hardship” determinations
In the absence of objective standards that are applied in a consistent manner, the decision as to whether or not to discharge a particular student loan under the “undue hardship” standard often appears arbitrary.99 Pursuant to 20 U.S.C. § 1221e-3, the Department of Education has authority to make and amend rules and regulations to govern applicable programs, including the federal student loan program.100 The regulations pertinent to the discharge of student loans in bankruptcy are currently found in 34 C.F.R. §685.217.101 The Department issued further guidance in its “Dear Colleague Letter” of July 7,2015.102 Within this context, the Department of Education should implement the following recommendations:
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Adopt a presumption of undue hardship for borrowers whose income is solely derived from disability or retirement benefits under the Social Security Act, or from a retirement fund or account
A significant proportion of bankruptcy debtors struggle financially for many years before filing for bankruptcy.103 Furthermore, the burden of carrying long-term debt can bring emotional, psychological, and sometimes physical costs to the debtor.104 The courts have been inconsistent in their consideration of age and retirement status under the “undue hardship” test.105 Adopting a presumption of undue hardship for those borrowers whose income is solely derived from disability or retirement benefits under the Social Security Act or from a retirement fund or account would target some of the most vulnerable student loan debtors who have reached retirement age and are often living on fixed incomes with limited ability to increase their income through additional work.106
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Voluntary contributions to retirement savings accounts should be treated as necessary expenses for the purposes of the “undue hardship” determination
In 2017, forty nine percent of adults aged fifty to sixty six had no personal retirement savings.107 Among those who do have such savings, the transition from defined benefit to defined contribution pension plans has resulted in a shift of the burden of saving for retirement from employers to employees.108 Moreover, the increasing preponderance of 401(k) plans has increased gaps in retirement preparedness based upon income, ethnicity, education, and marital status.109 In addition to these large-scale shifts in retirement funding, the courts have been inconsistent in their treatment of voluntary contributions to retirement savings accounts for the purpose of the “undue hardship” determination.110 Such inconsistency has resulted in decisions which can seem arbitrary and has created uncertainty among older adults seeking to discharge their student loan debt in a personal bankruptcy proceeding.111
Encouraging retirement savings is in the state’s interest as such contributions foster personal responsibility, build economic security among older adults, and reduce the number of seniors who become overly reliant on Social Security and other public benefit programs.112 Under the Bankruptcy Code and the “undue hardship” standard as currently applied, other expenditures directly related to personal and economic security, such as housing costs and health insurance premiums, are considered necessary and thus permissible expenditures.113 Since it is in the interests of both the individual and the state to encourage retirement savings, contributions to such accounts should be treated as necessary expenses for the purposes of the “undue hardship” determination.
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Congress should reinstitute the ability to discharge student loans in bankruptcy after a waiting period of ten years
Congress enacted Section 523(a)(8) to foster "the twin goals of rescuing the student loan program from fiscal doom and preventing abuse of the bankruptcy process by undeserving debtors."114 The Brunner test was developed in 1987 in response to a concern that some debtors were prematurely seeking a discharge soon after their student loans became due and without demonstrating a sustained period of inability to pay.115 Indeed, Marie Brunner herself filed for bankruptcy approximately seven months after receiving her master’s degree and sought to discharge her student loans two months later when they became due.116
Congress amended the waiting period from five years to seven years out of a similar concern that the bankruptcy process was being abused.117 The legislative history of the Higher Education Amendments of 1998 states that Congress eliminated the temporal discharge option in an effort to ensure the budget neutrality of the Amendments.118 Elimination of the waiting period thus resulted in “undue hardship” becoming the only mechanism through which student loan debt can be discharged in personal bankruptcy.119 Removal of the temporal factor in the dischargeability of student loan debt has contributed to a situation in which discharge of student loan debt in personal bankruptcy has become exceptionally difficult.120 As a result, struggling borrowers who are unable to discharge their student loan debt may ultimately carry the debt for decades extending beyond middle age and into their retirement years.121
Reinstatement of the availability of a student loan discharge after a ten-year waiting period hews to the original intent of Congress to allow those “honest but unfortunate” borrowers who have already struggled to repay their loans for a decade or more to attain a “fresh start.”122 Requiring debtors to wait ten years before filing for discharge of their student loans would mitigate the moral hazard of borrowers taking on large amounts of student loan debt under the assumption that they would never have to repay the debt in full.123
Reinstatement of the ability to discharge educational debt after a ten-year waiting period would have direct and indirect benefits for older Americans. Discharging their student loan debt would allow those in middle age and beyond to rebuild their financial position in order to support themselves or prepare to support themselves during their retirement years. Moreover, given the research linking the effects of debt on mental and physical health, providing relief to deserving debtors could result in improvements in health among older Americans.124 For these reasons, Congress should reinstate the ability to discharge student loan debt in a personal bankruptcy proceeding after a ten-year waiting period.
CONCLUSION
In August 2021, Senator Dick Durbin, Chair of the Senate Judiciary Committee, speaking of student loan debt on the Senate floor stated, “(f)or some, it's holding them back from buying a first home, starting a family, or a business. For others, it means delaying retirement because of this debt. This is not just an individual misfortune. The student debt crisis is a threat to our economy.”125 The continued increase in student loan debt among older Americans highlights the need for reform.126 This trend is not only the result of borrowers carrying student loan debt later in life, but also of non-traditional students incurring educational debt in mid-life in response to the economic pressures of a rapidly changing job market, as well as parents and grandparents financing the college educations of their children and grandchildren.127 Older adults face unique challenges as they seek to manage the burden of student loan debt while also striving to attain financial security in their retirement years.128 In the absence of large-scale reform of the student loan program, there are several adjustments that can be made relative to the dischargeability of student loan debt in bankruptcy that would ease the burden of such debts on older Americans.129
Rigid interpretation and application of the Brunner undue hardship test strays too far from Congressional intent to provide bankruptcy debtors with a “fresh start.”130 This rigidity is particularly problematic for older adults struggling with student loans as they are precluded from accessing a “fresh start” and must approach their retirement years with the burden of student loan debts incurred for themselves or their children/grandchildren.131 Revisions to the dischargeability of student loan debt in bankruptcy and increased consistency in the application of the “undue hardship” standard across the circuits would be of benefit to all student loan borrowers, but would be of particular benefit to those debtors in mid-life and beyond who are facing the possibility of carrying the debt into their retirement years. The policy changes suggested in this paper would serve to improve the lives and economic security of the growing number of older Americans struggling with the burden of carrying student loan debt into what should be their golden years.
Sara Connolly is currently a fourth-year law student in the evening program at Temple Beasley School of Law. Her areas of interest include trusts and estates and the legal issues facing older adults. Sara is married and has three children.
