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Duke Law Journal
VOLUME 70 DECEMBER 2020 NUMBER 3
THE STUDENT LOAN BANKRUPTCY GAP
JASON IULIANO†
A
BSTRACT
Each year, a quarter of a million student loan debtors file for
bankruptcy. Of those, fewer than three hundred discharge their
educational debt. That is a success rate of just 0.1 percent. This chasm
between success and failure is the titular “Student Loan Bankruptcy
Gap,” and it is a phenomenon that is unprecedented in the law.
Drawing upon an original dataset of nearly five hundred adversary
proceedings, this Article examines three key facets of the Student Loan
Bankruptcy Gap. First, it establishes the true breadth of the gap.
Second, it explores why the gap has persisted for more than two decades
and, in doing so, uncovers a creditor case-selection strategy designed to
deter debtors from bringing legitimate claims. And third, it identifies
solutions that have the potential to close the Student Loan Bankruptcy
Gap and bring debt relief to millions of individuals.
TABLE OF CONTENTS
Introduction ............................................................................................ 498
I. The Student Loan Bankruptcy Framework .................................... 501
A. The Discharge Process ......................................................... 501
B. The Myth of Nondischargeability ....................................... 504
Copyright © 2020 Jason Iuliano.
† Assistant Professor of Law, Villanova University. Ph.D. in Politics, Princeton University;
J.D., Harvard Law School. Thanks to Laura Napoli Coordes, Seth Frotman, Jonah Gelbach,
Melissa Jacoby, Ted Janger, John Pottow, Austin Smith, Madeleine Wanslee, Jay Westbrook, and
the participants of the International Insolvency Institute’s Global Bankruptcy Workshop at
Brooklyn Law School for valuable comments and discussions relating to this Article. And thanks
to Greg Bailey, Alice Douglas, Andy Lee, Amy Phelps, and Callie Terris for exceptional research
assistance.
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II. The Two-Step Analysis.................................................................... 507
A. Is It an Educational Debt? .................................................. 507
1. Data .................................................................................... 513
2. Theory ................................................................................ 518
B. Is There Undue Hardship? ................................................. 521
1. Data .................................................................................... 523
2. Theory ................................................................................ 526
III. Closing the Gap .............................................................................. 529
A. Consequences of Inaction ................................................... 529
B. Solutions ................................................................................ 535
1. Educational Benefit: Class Action Litigation ................. 537
2. Undue Hardship: Increasing Attorney Awareness ........ 539
Conclusion ............................................................................................... 542
I
NTRODUCTION
This year, almost a quarter of a million student loan debtors will
file for bankruptcy.
1
Of those, about three hundred will discharge their
educational debt.
2
These statistics portend good news . . . for 0.1
percent of the student loan filers. For the other 99.9 percent, however,
the outcome is bleak. They will exit bankruptcy with their student loans
in tow, denied the fresh start that the system promises to every “honest
but unfortunate debtor.”
3
Take a moment to consider what those statistics mean. For every
one thousand student loan debtors in bankruptcy, only one will clear
the legal hurdles erected by Congress and obtain a discharge. This
chasm between success and failure is the titular “Student Loan
Bankruptcy Gap.”
4
And it is an unprecedented situation in the law.
Nowhere else have so many people sought legal relief while so few
have obtained it.
The most troubling aspect, though, is that the gap does not result
from existing law. Contrary to the prevailing wisdom, the student loan
1. See Jason Iuliano, An Empirical Assessment of Student Loan Discharges and the Undue
Hardship Standard, 86 A
M. BANKR. L.J. 495, 528 (2012) [hereinafter Iuliano, Empirical
Assessment] (calculating the number of student loan debtors who file bankruptcy).
2. See infra Part II.
3. Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367 (2007) (“The principal purpose of
the Bankruptcy Code is to grant a ‘fresh start’ to the ‘honest but unfortunate debtor’” (quoting
Grogan v. Garner, 498 U.S. 279, 286, 287 (1991))).
4. Because referring to the situation as an access-to-justice problem is insufficient to
capture the scope of the crisis, this Article coins the term “Student Loan Bankruptcy Gap.”
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discharge laws do not present an insurmountable hurdle. About half of
all bankrupt student loan debtors would obtain relief if they took the
appropriate legal steps.
5
Unfortunately, because nearly everyone has
bought into the myth that student loans are not dischargeable, most
debtors do not take those steps.
This failure has made the Student Loan Bankruptcy Gap the most
pressing issue in educational debt today. Given that student loan debt
now exceeds $1.7 trillion,
6
this is no small claim. But it is supported by
the evidence. The Student Loan Bankruptcy Gap has harmed millions
of members of Generation X, is harming millions of millennials, and
will harm millions in Generation Z—unless something changes.
7
Although scholars have been discussing failures in the student
loan discharge process for more than a decade,
8
they have neither
recognized the true extent of the Student Loan Bankruptcy Gap nor
understood the reason for its continued existence. This Article fills
both holes in the literature. First, by presenting original nationwide
data, this Article puts concrete numbers to the problem. And second,
by conducting an in-depth analysis of student loan bankruptcy
proceedings, it identifies the primary source of the Student Loan
Bankruptcy Gap: creditor manipulation.
Specifically, the data show that creditors have adopted a case-
selection strategy that distorts precedent and masks the true likelihood
of obtaining a student loan discharge. In particular, creditors are
engaging in strategic settlement—a process that involves settling
unfavorable cases to avoid adverse precedent and aggressively
litigating favorable cases to tilt the law in their favor. Ultimately,
through repeated interactions with the courts, creditors have
developed a body of precedent that supports their position,
5. See infra Part II.B.
6. See Student Loan Debt Clock, F
INAID, http://www.finaid.org/loans/studentloandebt
clock.phtml [https://perma.cc/X7R8-UCMM].
7. See infra Parts II.B, III.A, III.B.
8. See, e.g., Katherine Porter, College Lessons: The Financial Risks of Dropping Out, in
B
ROKE: HOW DEBT BANKRUPTS THE MIDDLE CLASS 85, 98 (Katherine Porter ed., 2012)
(advocating for bankruptcy courts to take into account the type of degree and whether the degree
was completed when assessing whether a debtor should have their student loan discharged);
Stephen G. Gilles, The Judgment-Proof Society, 63 W
ASH. & LEE L. REV. 603, 615 (2006) (arguing
that “federal law [makes] it extremely difficult for individuals to default on student loans”); John
A.E. Pottow, The Nondischargeability of Student Loans in Personal Bankruptcy Proceedings: The
Search for a Theory, 44 C
AN. BUS. L.J. 245, 265–76 (2006) (concluding that most policy
justifications do not support the “overly broad U.S. approach” to student loan
nondischargeability).
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notwithstanding the fact that debtors win the vast majority of cases. By
employing this strategy, creditors have successfully cultivated a myth
of nondischargeability—a myth that scholars,
9
bankruptcy attorneys,
10
and media commentators
11
all subscribe to.
12
This Article’s findings
dispel that myth and offer hope to the millions of borrowers burdened
by student loans they can never afford to pay back.
Although identifying the myth is a crucial first step, any
comprehensive solution must go further and encourage individuals to
assert their legal rights. This approach could take a variety of forms,
from providing bankrupt debtors with information about the discharge
process, to improving how attorneys evaluate student loan cases to
encouraging journalists to present a more data-driven—and less
sensationalistic—view of student loan bankruptcy. Despite their
modest nature, these debtor-focused reforms have two key virtues over
the sweeping legislative and judicial changes that scholars
13
and
9. See, e.g., Charles J. Tabb, Bankruptcy and Entrepreneurs: In Search of an Optimal
Failure Resolution System, 93 A
M. BANKR. L.J. 315, 334 (2019) (“[A] debtor is burdened by her
student loans forever unless she can prove an undue hardship, which is a very difficult standard
to satisfy under current interpretations.”); William Voegeli, The Higher Education Hustle:
Political Correctness and the Credentials-Industrial Complex, 13 C
LAREMONT REV. BOOKS 12, 14
(2013) (“Debts incurred by those . . . who will never finish school, are no more dischargeable than
degree recipients’ liabilities.”).
10. See, e.g., Do I Need an Attorney for Student Loan Discharges if There Is Evidence that
They Engaged in Predatory Student Loan Lending?, A
VVO, https://www.avvo.com/legal-answers/
do-i-need-an-attorney-for-student-loan-discharges—2252306.html [https://perma.cc/2A27-9HEE]
(responding to the question, bankruptcy attorneys uniformly gave discouraging answers,
describing the process as “very difficult,” if not impossible, with one attorney commenting that
he has “filed more than 6,000 cases and [is] yet to see student loans discharged”).
11. See, e.g., Jessica Dickler, Trump Administration May Make It Easier To Wipe Out
Student Debt in Bankruptcy, CNBC (Feb. 21, 2018, 1:37 PM), https://www.cnbc.com/2018/02/21/
trump-administration-may-make-it-easier-to-wipe-out-student-debt-in-bankruptcy.html [https://
perma.cc/3F8G-79QA] (quoting Mark Kantrowitz as noting that “[a]s of now, ‘it’s almost
impossible to discharge student loans in bankruptcy’”).
12. See Aaron N. Taylor & Daniel J. Sheffner, Oh, What a Relief It (Sometimes) Is: An
Analysis of Chapter 7 Bankruptcy Petitions To Discharge Student Loans, 27 S
TAN. L. & POL’Y
REV. 295, 297 (2016) (“Conventional wisdom dictates that it is all-but-impossible to discharge
student loans in bankruptcy.”).
13. See, e.g., Robert C. Cloud & Richard Fossey, Facing the Student-Debt Crisis: Restoring
the Integrity of the Federal Student Loan Program, 40 J.C.
& U.L. 467, 497 (2014) (arguing that
“the ‘undue hardship’ provision in the Bankruptcy Code should be repealed”); Rafael I. Pardo,
The Undue Hardship Thicket: On Access to Justice, Procedural Noncompliance, and Pollutive
Litigation in Bankruptcy, 66 F
LA. L. REV. 2101, 2177–78 (2014) (advocating for a system in which
judges “play a more robust monitoring role in undue hardship adversary proceedings and
thus . . . serve as a check against any attempts by creditors to run roughshod over student-loan
debtor’s procedural rights”).
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politicians
14
have long advocated—namely, effectiveness and ease of
implementation.
This Article proceeds in three parts. Part I frames the student loan
bankruptcy debate. In doing so, it highlights the unique laws that
govern the student loan discharge process and explores the criticisms
that scholars and attorneys levy against those laws. Next, Part II
presents original data that challenge the veracity of these critiques.
Specifically, the data reveal two key findings: (1) that student loan
creditors have engaged in a case-selection strategy designed to deter
debtors from bringing legitimate claims, and (2) that, every year, tens
of thousands of bankrupt debtors miss out on obtaining a student loan
discharge simply because they fail to request one. Finally, Part III
explores the path forward. It begins by discussing the social and
economic consequences of inaction and concludes by offering solutions
that have the potential to close the Student Loan Bankruptcy Gap.
I.
THE STUDENT LOAN BANKRUPTCY FRAMEWORK
A. The Discharge Process
Understanding the student loan discharge process requires a brief
dive into the Bankruptcy Code. The current iteration of the law
governing student loan discharges was enacted as part of the 2005
Bankruptcy Abuse Prevention and Consumer Protection Act.
15
The
relevant statutory language reads as follows:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b)
of this title does not discharge an individual debtor from any
debt . . . .
(8) unless excepting such debt from discharge under this
paragraph would impose an undue hardship on the debtor and
the debtor’s dependents, for—
14. See, e.g., Zack Friedman, Bernie Sanders: I Will Cancel All $1.6 Trillion of Your Student
Loan Debt, F
ORBES (June 24, 2019, 7:18 AM), https://www.forbes.com/sites/zackfriedman/2019/
06/24/student-loans-bernie-sanders/#9623f33fc295 [https://perma.cc/E6X8-VALB] (comparing
Bernie Sanders’s plan to eliminate all student loan debt with Elizabeth Warren’s plan to cancel
$50,000 in student loan debt for individuals earning less than $100,000).
15. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-
8, 119 Stat. 23 (codified as amended in scattered sections of 11 U.S.C.).
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(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 in part
by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an
educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education
loan, as defined in section 221(d)(1) of the Internal
Revenue Code of 1986, incurred by a debtor who is an
individual.
16
F
IGURE
1:
T
HE
S
TUDENT
L
OAN
B
ANKRUPTCY
P
ROCESS
Although there is a lot to parse in this statutory excerpt, Figure 1
aims to provide a clear explanation of the text. As the flow chart
illustrates, judges must engage in a two-step analysis to determine
whether a student loan is dischargeable. At step one, the judge must
resolve whether the loan at issue is a qualifying educational debt under
16. 11 U.S.C. § 523(a)(8) (2018).
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§ 523(a)(8) of the Bankruptcy Code. The precise contours of this
statutory provision will be important later.
17
For present purposes,
however, it is sufficient to know that the student loan discharge
exemption only applies to three categories of educational debt: (1)
government and nonprofit-backed loans and educational benefit
overpayments,
18
(2) obligations to repay funds received as an
educational benefit, scholarship, or stipend,
19
and (3) qualified
education loans.
20
If a student loan does not fall within at least one of
these categories,
21
the inquiry ends, and the debt is discharged through
the normal bankruptcy process. If, however, the student loan satisfies
the criteria for at least one of these categories, then it is a qualifying
educational debt under § 523(a)(8), and step two of the analysis is
triggered.
At this second stage of the inquiry, the judge must determine
whether repayment of the debt would “impose an undue hardship on
the debtor and the debtor’s dependents.”
22
Because Congress has
never defined “undue hardship,” the judiciary has been forced to flesh
out the meaning of the phrase. To that end, most courts have coalesced
around a test first set forth in Brunner v. New York State Higher
Education Services Corp.
23
To prove undue hardship under the
17. See infra Part II.A. See generally Jason Iuliano, Student Loan Bankruptcy and the
Meaning of Educational Benefit, 93 A
M. BANKR. L.J. 277 (2019) [hereinafter Iuliano, Student
Loan Bankruptcy] (arguing that courts have misinterpreted the statutory criteria for discharging
student loans in bankruptcy).
18. 11 U.S.C. § 523(a)(8)(A)(i).
19. Id. § 523(a)(8)(A)(ii).
20. Id. § 523(a)(8)(B).
21. For a discussion of the scope of these categories, see infra Part II.A.
22. See § 523(a)(8); Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d
Cir. 1987) (per curiam) (citing § 523(a)(8)).
23. Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987) (per
curiam). The Eighth Circuit and most bankruptcy courts in the First Circuit have adopted an
alternative test known as the “totality-of-the-circumstances test.” See, e.g., In re Long, 322 F.3d
549, 553–54 (8th Cir. 2003) (holding that the totality-of-the-circumstances test requires courts to
consider: “(1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a
calculation of the debtor’s and her dependent’s reasonable necessary living expenses; and (3) any
other relevant facts and circumstances surrounding each particular bankruptcy case”); Bronsdon
v. Educ. Credit Mgmt. Corp. (In re Bronsdon), 435 B.R. 791, 797–98 (B.A.P. 1st Cir. 2010) (noting
that “[m]ost of the bankruptcy courts within the First Circuit have adopted the totality of the
circumstances test over the Brunner test”). Although bearing a distinct name and purporting to
undertake a more holistic analysis of the debtor’s situation, the totality-of-the-circumstances test
yields outcomes that mirror those in Brunner Circuits. See Iuliano, Empirical Assessment, supra
note 1, at 497 (“Identical debtors filing in a Brunner circuit and a totality of the circumstances
circuit should expect similar outcomes.”).
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Brunner standard, a debtor must establish the following three
elements:
(1) 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;
(2) that additional circumstances exist indicating that this state of
affairs is likely to persist for a significant portion of the repayment
period of the student loans; and
(3) that the debtor has made good faith efforts to repay the loans.
24
This Article explores the meaning of these three elements in a
later Part.
25
For now, it is sufficient to know that proving undue
hardship requires the debtor to show (1) a current inability to repay
the loans, (2) a future inability to repay the loans, and (3) a good faith
effort to repay the loans.
26
If the debtor satisfies these three elements,
then the student loan is discharged. Otherwise, the debt is
nondischargeable and survives bankruptcy.
As this discussion highlights, there are two paths to discharge. The
debtor can either show that the student loan is not a qualifying debt
under § 523(a)(8) or prove that repayment would impose an undue
hardship. If the debtor clears either of these hurdles, then the student
loan is discharged.
B. The Myth of Nondischargeability
Despite the existence of these two discharge pathways, a myth of
nondischargeability pervades the discourse on student loan debt.
27
At
the extreme, many commentators fail to acknowledge either of these
pathways and, instead, assert that the law places a blanket prohibition
on the elimination of educational debt. As one journalist declares
without qualification, “[S]tudent loans are not dischargeable in
24. Brunner, 831 F.2d at 396.
25. See infra Part II.B.
26. I borrow this terminology from Rafael I. Pardo & Michelle R. Lacey, Undue Hardship
in the Bankruptcy Courts: An Empirical Assessment of the Discharge of Educational Debt, 74 U.
CIN. L. REV. 405, 496 (2005).
27. See, e.g., Mary Pilon, The Student Loan Effect, W
ALL ST. J. (Feb. 18, 2010, 9:00 AM),
https://blogs.wsj.com/juggle/2010/02/18/the-student-loan-effect [https://perma.cc/6UDE-RPKY]
(“[Student loan] debt is associated with a unique sense of hopelessness.”).
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bankruptcy.”
28
And as another writes, “Since student loans are not
dischargeable in a bankruptcy, even the most financially distressed
former students cannot get out from under their debt.”
29
The media is,
unfortunately, not alone in advancing such claims. Even some scholars
make categorical statements about the impossibility of discharging
student loan debt.
30
Although these extreme positions anchor the myth,
more nuanced views are part of the discourse as well.
Unfortunately, the more measured claims are just as discouraging
to debtors.
31
They describe a system in which discharging student loans
is a theoretical possibility but a practical impossibility.
32
The following
quote from a consumer bankruptcy attorney is illustrative:
Student loans are not dischargeable in bankruptcy under almost any
circumstances. There is such a thing as a hardship discharge of student
loan debt, but to get one of those you need to be over the age of
eighty, have no hearing, and have a serious mental illness that
prevents you from ever being able to earn a dime or receive a social
security payment, and not have any family that can assist you.
33
28. Robert Jonathan, Student Loans: Paying Them Off Without Getting Schooled,
I
NQUISITR (July 8, 2012), https://www.inquisitr.com/271834/student-loans-paying-them-off-
without-getting-schooled [https://perma.cc/78CW-4G8D].
29. Rachel E. Dwyer, Student Loans and Graduation from American Universities, T
HIRD
WAY (June 18, 2015), https://www.thirdway.org/report/student-loans-and-graduation-from-
american-universities [https://perma.cc/4B98-JWRD]. Two authors went so far as to describe the
system as follows:
[Banks] wrote the student loan law, in which the fine-print says they aren’t
“dischargable [sic].” So even if you file for bankruptcy, the payments continue due . . . .
“You will be hounded for life . . . . They will garnish your wages. They will intercept
your tax refunds. You become ineligible for federal employment.”
Andrew Hacker & Claudia Dreifus, The Debt Crisis at American Colleges, A
TLANTIC (Aug. 17,
2011), https://www.theatlantic.com/business/archive/2011/08/the-debt-crisis-at-american-colleges/243777
[https://perma.cc/NVG6-FY5Z].
30. See, e.g., Voegeli, supra note 9, at 14 (“[S]tudent loans are not dischargeable in
bankruptcy.”).
31. See, e.g., Kevin Carey, Lend with a Smile, Collect with a Fist, N.Y.
TIMES (Nov. 27, 2015),
https://nyti.ms/1NyckmI [https://perma.cc/YG7V-XEJE] (“[F]ederal law all but precludes
[bankruptcy as a] method of discharging student loans.”).
32. See, e.g., Mike Brown, Study: For Those Filing for Bankruptcy, Student Loan Debt Still
Lingers On, L
ENDEDU (June 11, 2019), https://lendedu.com/blog/student-loans-bankruptcy
[https://perma.cc/F54S-Y7SB] (“[S]tudent loan debt is one form of debt that is almost always
impossible to discharge in bankruptcy.”).
33. David R. Black, Successfully Guiding a Client Through the Chapter 13 Filing Process,
A
SPATORE, Jan. 2014, at *13, 2014 WL 10512.
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Although seemingly hyperbolic, this view represents how most
lawyers and scholars perceive the undue hardship standard.
34
Almost
to a one, they make bold statements regarding the herculean effort
required to prove undue hardship.
35
This myth is so pervasive and so frequently echoed that one could
fill multiple pages with quotes declaring that student loans “are almost
impossible to discharge in bankruptcy.”
36
To spare the reader that
undertaking, consider just one framing of the problem that conjures a
particularly striking image: “A student loan resembles a labyrinth; it’s
easy for you to enter, but once you get into trouble, it is difficult, maybe
impossible, to exit.”
37
This metaphor is apt, though not for the reasons
the scholars who drew the comparison believe. As the remainder of
34. See, e.g., Cloud & Fossey, supra note 13, at 479 (“[F]ederal courts have interpreted the
‘undue hardship’ requirement in such a way that makes it very difficult for student-loan debtors
to obtain bankruptcy relief.”); Jonathan M. Layman, Forgiven but Not Forgotten: Taxation of
Forgiven Student Loans Under the Income-Based-Repayment Plan, 39 C
AP. U. L. REV. 131, 136
(2011) (“[F]ederally backed student loans cannot be discharged in bankruptcy except in some
rare cases of extreme financial hardship.”); The Student Borrower Bankruptcy Relief Act of 2019,
38 A
M. BANKR. INST. J. 8, 70 (2019) (describing the undue hardship standard as “nearly
impossible to demonstrate”); Student Loans Difficult—But Not Impossible—To Discharge in
Bankruptcy, M
INILLO & JENKINS CO., LPA, https://www.mjbankruptcy.com/articles/student-
loans-difficult-but-not-impossible-to-discharge-in-bankruptcy [https://perma.cc/S6QA-Y2RE]
(“Discharging student loan debt in bankruptcy is exceedingly difficult and it occurs very rarely.”).
35. See, e.g., Victoria J. Haneman, A Timely Proposal To Eliminate the Student Loan Interest
Deduction, 14 N
EV. L.J. 156, 179 n.142 (2013) (“Student loans are nondischargeable absent a
showing of undue hardship, which is a standard that is seldom met.”). A small number of attorneys
have tried to chip away at the narrative of hopelessness. See, e.g., Austin Smith, Not All Student
Loans Are Non-Dischargeable in Bankruptcy and Creditors Know This, S
TUDENT BORROWER
PROT. CTR. (Mar. 18, 2019), https://protectborrowers.org/not-all-student-loans-are-non-dischargeable
-in-bankruptcy-and-creditors-know-this [https://perma.cc/NB3W-XQ2C] (“There is a great deal
of misinformation surrounding student loans in bankruptcy. Most people believe that anything
called a ‘student loan,’ or any debt made to a student, cannot be discharged in bankruptcy. This
notion is fundamentally untrue.”); Services I Provide,
STUDENT LOAN LAW., https://
thestudentloanlawyer.com/services [https://perma.cc/F9YR-VG5N] (offering legal help and
resources for managing student loan debt).
36. See Ryan Cooper, Opinion, The Case for Erasing Every Last Penny of Student Debt,
W
EEK (Feb. 8, 2018), https://theweek.com/articles/753769/case-erasing-every-last-penny-student-
debt [https://perma.cc/VAY9-NV2E]. A salient example involves the National Bankruptcy
Review Commission, which stated in its final report that “[a]lthough the drafters of the
nondischargeability provision may have intended that those who truly cannot pay should be
relieved of the debt under the undue hardship provision, in practice, nondischargeability has
become the broad rule with only a narrowly construed undue hardship discharge.” N
AT’L BANKR.
REV. COMM’N, BANKRUPTCY: THE NEXT TWENTY YEARS 211 (1997). The commission went on
to observe that “[i]t hardly is surprising that some courts see few requests for hardship discharges
of educational loans given the pitfalls of the undue hardship standard.” Id. at 212.
37. Doug Rendleman & Scott Weingart, Collection of Student Loans: A Critical
Examination, 20 W
ASH. & LEE J. CIV. RTS. & SOC. JUST. 215, 218 (2014).
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this Article will argue, the situation is dire, but the bankruptcy laws are
not to blame. Instead, it is the bleak perception of those laws that has
allowed the Student Loan Bankruptcy Gap to persist.
II.
THE TWO-STEP ANALYSIS
This Part analyzes the two discharge pathways in order. Each
analysis begins with a discussion of the key legal arguments that define
the inquiry. Next, original data are presented showing that both steps
of the analysis offer debtors a viable path to discharging their student
loans. One notable pattern in the data is revealing—namely, limited
precedent favoring creditors coupled with an overwhelming number of
settlements favoring debtors. Drawing on litigation theory, this Part
argues that the data pattern is best explained by strategic settlement.
In short, creditors are settling unfavorable cases to avoid adverse
precedent and litigating good cases to cultivate favorable precedent.
Ultimately, this litigation strategy has distorted the law and cultivated
the myth of nondischargeability.
A. Is It an Educational Debt?
In student loan bankruptcy cases, the first issue that a judge must
decide is whether the debt in question is a qualifying educational debt
under § 523(a)(8) of the Bankruptcy Code. As discussed above, if the
loan falls into any of three statutory categories, it is nondischargeable
absent a showing of undue hardship.
38
This section provides a brief
overview of two of the categories and then takes a deeper look at the
final statutory provision.
The first category is set forth in § 523(a)(8)(A)(i) and
encompasses any “educational benefit overpayment or loan made,
insured, or guaranteed by a governmental unit, or made under any
program funded in whole or in part by a governmental unit or
nonprofit institution.”
39
Courts have read this language to apply to “all
situations of student loans funded by the government or nonprofit
institutions.”
40
This category exists to protect American taxpayers and
nonprofit organizations from bearing the burden of student loan
defaults.
41
38. See supra notes 18–20 and accompanying text.
39. 11 U.S.C. § 523(a)(8)(A)(i) (2018).
40. E.g., In re Rezendes, 324 B.R. 689, 692 (Bankr. N.D. Ind. 2004).
41. For a more detailed discussion of this provision, see Iuliano, Student Loan Bankruptcy,
supra note 17, at 283.
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The second category falls under § 523(a)(8)(B) and includes any
“educational loan that is a qualified education loan, as defined in
section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a
debtor who is an individual.”
42
As anyone who has opened the Tax
Code would guess, digging into this provision means wading through
more than a dozen technical terms. Completing that investigation,
though, would reveal that this category includes any debts that are
incurred for the purpose of paying approved costs of attendance at an
accredited educational institution.
43
The third category—and the one with which this Section is
primarily concerned—is found in § 523(a)(8)(A)(ii). This provision
excepts from discharge any “obligation to repay funds received as an
educational benefit, scholarship, or stipend.”
44
Most courts have
interpreted this clause as a broad catchall, reading it to include any
educational debts not covered by the other two provisions.
45
This sweeping analysis turns on the phrase “educational benefit.”
46
Specifically, judges have endorsed a colloquial reading of the phrase,
in which “benefit” means “an advantage or profit gained from
something.”
47
Understood this way, an “educational benefit” is
anything that facilitates or advances an individual’s education. In short,
if the debt is incurred to fund any educational expenses, then it is an
educational benefit. Given the breadth of this interpretation, I have
previously labeled it the “Broad Reading.”
48
In a prior article
49
and a number of amicus briefs,
50
I have proposed
an alternative interpretation of “educational benefit”—an
42. § 523(a)(8)(B).
43. For a more detailed discussion of this provision, see Iuliano, Student Loan Bankruptcy,
supra note 17, at 286–88.
44. § 523(a)(8)(A)(ii).
45. See, e.g., In re Corbin, 506 B.R. 287, 296 (Bankr. W.D. Wash. 2014) (observing that “a
majority of courts have held that a loan qualifies as an ‘educational benefit’ if the stated purpose
for the loan is to fund educational expenses.” (citing Maas v. Northstar Educ. Fin., Inc. (In re
Maas), 497 B.R. 863, 869–70 (Bankr. W.D. Mich. 2013))).
46. See, e.g., In re Beesley, No. 12-24194-CMB, 2013 WL 5134404, at *4 (Bankr. W.D. Pa.
Sept. 13, 2013) (“[C]ourts . . . have interpreted ‘funds received as an educational benefit’ to
include loans.”); In re Rumer, 469 B.R. 553, 561 (Bankr. M.D. Pa. 2012) (writing that “loans
received as an educational benefit, scholarship, or stipend” are excepted from discharge).
47. Benefit, O
XFORD ENG. DICTIONARY, https://en.oxforddictionaries.com/definition/benefit
[https://perma.cc/M4JB-K8YP].
48. See Iuliano, Student Loan Bankruptcy, supra note 17, at 291.
49. See id. at 288–313.
50. See generally Brief of Bankruptcy Scholars as Amici Curiae in Support of Appellees and
Affirmance, McDaniel v. Navient Sols., LLC (In re McDaniel), No. 18-1445 (10th Cir. Apr. 18,
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interpretation that I refer to as the “Narrow Reading.” The Narrow
Reading argues that “benefit” should be given the same meaning it has
when used in phrases such as “unemployment benefit,” “insurance
benefit,” and “retirement benefit.”
51
The defining feature of these
types of benefits is not that they promote an individual’s well-being but
rather that they provide monetary assistance that the beneficiary is
legally entitled to receive.
52
The payment can come from a variety of
sources—for example, the state, an employer, or an insurance
company—but in each instance, the payer is distributing guaranteed
benefits.
53
To draw out the distinction between the two readings of “benefit,”
consider the phrase “retirement benefit.” When asked what retirement
benefits are, people think of programs that provide defined payments
to retirees, such as pensions and social security. But consider another
example. Suppose someone offered a retiree one hundred dollars. Is
that a retirement benefit as well? In a strained sense, it may be. The
money does benefit the individual during her retirement. That said, the
money is clearly not a retirement benefit in any conventional sense of
the phrase. And notwithstanding the fact that the money benefits the
retiree, it would be very odd to say that the monetary gift provides a
retirement benefit.
Nonetheless, that situation is precisely analogous to what the
courts have done in the context of educational benefit. They have
defined each of the words by looking at them in isolation and have then
concluded that any monetary transfer benefiting an individual’s
education is an “educational benefit.” In doing so, courts have failed to
account for the way in which “educational” and “benefit” combine to
form a specialized term. If the courts were to read “benefit” in the same
2019) [hereinafter In re McDaniel Brief] (“The plain meaning of the statute, the legislative intent
behind the statutory exemption, and the Bankruptcy Code’s, fresh-start policy all support a
narrow reading of the student loan discharge exemption.”); Brief of Bankruptcy Scholars as
Amici Curiae in Support of Appellees, In re Crocker, 941 F.3d 206 (5th Cir. 2019) (No. 18-20254)
[hereinafter In re Crocker Brief] (same).
51. Benefit, D
ICTIONARY.COM, http://www.dictionary.com/browse/benefit?s=t [https://perma.cc/
4ZK3-CPZ2] (defining “benefit” as “a payment or gift . . . given by an employer, an insurance
company, or a public agency”).
52. See Benefit, O
XFORD ENG. DICTIONARY, supra note 47 (defining “benefit” as “[a]
payment made by the state or an insurance scheme to someone entitled to receive it”).
53. See Benefit, M
ERRIAM-WEBSTER DICTIONARY, https://www.merriam-webster.com/
dictionary/benefit [https://perma.cc/3ANF-DMS7] (defining “benefit” as “financial help in time
of sickness, old age, or unemployment . . . a payment or service provided for under an annuity,
pension plan, or insurance policy . . . a service (such as health insurance) or right (as to take
vacation time) provided by an employer in addition to wages”).
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510 DUKE LAW JOURNAL [Vol. 70:497
way they read the word in analogous contexts—such as “retirement
benefit” or “employment benefit”—“educational benefit” would refer
to a type of debt known as a conditional educational grant. These
debts, in short, include any educational funds that a student receives in
exchange for a promise to perform future services.
The Reserve Officer Training Corps is a notable example of an
educational benefit program. The fund pays college tuition for students
who meet certain qualifications and who agree to serve in the military
for a given number of years following graduation.
54
Another example
of an educational benefit is the federally funded National Health
Service Corps scholarship. Similar to its military counterpart, this
program pays the tuition of medical school students who agree to spend
several years working in underserved areas after graduation.
55
Importantly, these programs do not loan money but rather offer
conditional educational grants. The student must repay the money only
if she does not meet her obligations. This type of agreement is what the
statute means when it refers to an educational benefit.
A few key points illustrate the superiority of the Narrow
Reading.
56
First, if “educational benefit” is read broadly, then
§ 523(a)(8)(A)(i) and § 523(a)(8)(B) are rendered irrelevant. Recall
that these provisions cover loans backed by the federal government or
nonprofits and qualifying education loans. Both of these categories of
debts are undeniably educational benefits under the Broad Reading.
This interpretation, however, presents a significant problem. Giving
“educational benefit” a meaning that completely subsumes two other
statutory provisions violates the canon against surplusage.
57
Importantly, no such concern arises under the Narrow Reading. All
three subsections of § 523(a)(8) retain distinct, yet complementary,
meanings.
54. Angela Frisk, Get Money for College Through ROTC Programs, U.S. NEWS & WORLD
REP. (July 25, 2013, 10:00 AM), https://www.usnews.com/education/blogs/the-scholarship-coach/
2013/07/25/get-money-for-college-through-rotc-programs [https://perma.cc/5FR8-L67M].
55. Scholarship Program Overview, N
AT’L HEALTH SERV. CORPS, https://nhsc.hrsa.gov/
scholarships/overview/index.html [https://perma.cc/C43E-2K33].
56. For a comprehensive discussion of the arguments in favor of the Narrow Reading, see
McDaniel Brief, supra note 50; In re Crocker Brief, supra note 50; Iuliano, Student Loan
Bankruptcy, supra note 17, at 288–313.
57. See, e.g., NLRB v. SW Gen., Inc., 137 S. Ct. 929, 941 (2017) (writing that courts must
“give effect, if possible, to every clause and word of a statute” (quoting Williams v. Taylor, 529
U.S. 362, 404 (2000))); TRW Inc. v. Andrews, 534 U.S. 19, 31 (2001) (“[A] statute ought, upon
the whole, to be so construed that, if it can be prevented, no clause, sentence, or word shall be
superfluous, void, or insignificant.” (quoting Duncan v. Walker, 533 U.S. 167, 174 (2001))).
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Second, the phrase “educational benefit” appears in another part
of the statute, and there, courts have interpreted the term in line with
the Narrow Reading.
58
The specific occurrence is in § 523(a)(8)(A)(i),
and the operant phrase is “educational benefit overpayment.”
59
An
opinion by a bankruptcy court in New Mexico provides a clear
explanation of how courts have interpreted the phrase in this context:
“Educational benefit overpayment occurs in programs like the GI Bill,
where students receive periodic payments upon their certification that
they are attending school. When a student receives funds but is not in
school, this is a[n] educational benefit overpayment.”
60
Interpreting
“educational benefit” in completely different ways in related sections
of a statute would make no sense. As the Supreme Court has affirmed
repeatedly, when identical words are used multiple times throughout a
statute, they must be given the same meaning each time, absent a
compelling reason otherwise.
61
And third, the only mention of “educational benefit” in the
legislative record strongly supports the Narrow Reading. As part of a
1990 congressional hearing, the chair of the Subcommittee on
Economic and Commercial Law asked the U.S. Attorney for the
Eastern District of Texas to explain “[t]he specific problem [the
provision] is designed to address.”
62
The U.S. Attorney responded as follows:
This section adds to the list of non-dischargeable debts, obligations
to repay educational funds received in the form of benefits (such as
VA benefits), scholarships (such as medical service corps
58. See, e.g., In re Moore, 407 B.R. 855, 859 (Bankr. E.D. Va. 2009) (describing “educational
benefit overpayment” as “an overpayment from a program like the GI Bill, where students
receive payments even though they are not attending school”).
59. 11 U.S.C. § 523(a)(8)(A)(i) (2018).
60. In re Coole, 202 B.R. 518, 519 (Bankr. D. N.M. 1996). One court explained educational
benefit overpayments in further detail:
Clearly, Plaintiff’s failure to pay his student housing obligations cannot be deemed
debt for ‘an educational benefit overpayment.’ Defendant paid nothing to Plaintiff.
NYU merely allowed Plaintiff to live at school facilities in consideration for certain
charges which were not paid. No linguistic gyration can twist a no payment or
underpayment by Plaintiff to an overpayment by Defendant.
In re Alibatya, 178 B.R. 335, 338 (Bankr. E.D.N.Y. 1995).
61. See, e.g., Henson v. Santander Consumer USA Inc., 137 S. Ct. 1718, 1723 (2017)
(“‘[I]dentical words used in different parts of the same statute’ carry ‘the same meaning.’”
(quoting IBP, Inc. v. Alvarez, 546 U.S. 21, 34 (2005))).
62. Federal Debt Collection Procedures of 1990: Hearing Before the Subcomm. on Econ. &
Com. L. of the H. Comm. on the Judiciary, 101st Cong. 42 (1990) (question for the record
submitted by Rep. Brooks, Chairman, H. Subcomm. on Econ. & Com. L.).
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512 DUKE LAW JOURNAL [Vol. 70:497
scholarships) and stipends. These obligations are often very sizable
and should receive the same treatment as a “student loan” with regard
to restrictions on dischargeability in bankruptcy.’
63
This answer directly restates the Narrow Reading. The U.S.
Attorney clarified that educational benefits are not loans but rather
“educational funds received in the form of benefits.”
64
They are, in
other words, conditional educational grants.
Notably, within the last year, two courts of appeals have
considered this issue and both have endorsed the Narrow Reading.
65
Accordingly, this Article does not pursue these points further. Instead,
it focuses on an objection to the argument—namely, if the Narrow
Reading is so obviously correct, why did the Broad Reading prevail for
more than a decade in the overwhelming majority of bankruptcy
cases?
66
As I will show, the answer to that question lies in how student loan
creditors have litigated educational benefit cases. Specifically, they
have worked to ensure that courts only hear arguments in favor of the
Broad Reading. When debtors advance a narrow interpretation of the
statute, creditors entice them to drop the case by proposing
confidential settlement agreements. By contrast, when debtors
concede the accuracy of the Broad Reading, creditors pursue litigation
techniques designed to manufacture precedent supportive of their
preferred interpretation. This process is called strategic settlement.
67
And it is concerning because it exploits an access-to-justice gap in the
bankruptcy system.
Because student loan debtors often lack the ability to pay for
adequate counsel, most never learn they have strong legal claims in this
area and, therefore, acquiesce to their creditors’ demands. Moreover,
given that student loan debtors have no incentive to establish sound
63. Id. at 74–75 (response of Mr. Wortham, United States Attorney for the Eastern District
of Texas).
64. Id. at 74.
65. See McDaniel v. Navient Sols., LLC (In re McDaniel), No. 18-1445, 2020 WL 5104560,
at *7–10 (10th Cir. Aug. 31, 2020) (endorsing the Narrow Reading); Crocker v. Navient Sols.,
LLC (In re Crocker), 941 F.3d 206, 217–24 (5th Cir. 2019) (finding that the Broad Reading “is not
only unsupported by the text, it is unsupported by some of [the appellant’s] authorities” and
holding “that ‘educational benefit’ is limited to conditional payments with similarities to
scholarships and stipends”).
66. For a discussion of the case law endorsing the Broad Reading, see Iuliano, Student Loan
Bankruptcy, supra note 17, at 284–86.
67. See Frank B. Cross, Decisionmaking in the U.S. Circuit Courts of Appeals, 91 C
ALIF. L.
REV. 1457, 1492–94 (2003) [hereinafter Cross, Decisionmaking] (discussing strategic settlement).
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precedent for future cases, those few individuals who do bring
challenges are eager to accept settlement offers. Because of this
incentive structure, creditors have been able to manufacture favorable
precedent, even in the absence of legally defensible arguments. This
strategy has been highly successful and has created a perception of
nondischargeability that has deterred many potential litigants.
68
The following two Subsections focus on the structural issues that
underlie much of the student loan bankruptcy litigation. The first
Section presents data showing the existence of a significant access-to-
justice gap. And the second discusses the litigation incentives that have
enabled this problem to persist.
1. Data. A majority of courts that ruled on the meaning of
educational benefit adopted the Broad Reading. That much is clear
from the case law. But what is not clear is why judges have endorsed
that interpretation. Is it because they believe the arguments in the
Broad Reading’s favor are more compelling, or is it simply because
they do not hear arguments against it? This Subsection presents data
that bear on this question and finds that the evidence points toward the
latter explanation. Judges have not had the opportunity to weigh the
Narrow Reading against the Broad Reading. And more troublingly,
student loan creditors have worked to prevent courts from having such
an opportunity. Uncovering this litigation strategy requires looking
beyond the judicial opinions to the parties’ briefs. This Subsection
accomplishes that by presenting data on those cases that addressed the
68. This perception of nondischargeability is widespread among consumer bankruptcy
attorneys. See, e.g., Rich Feinsilver, Education Department Reviewing Discharge of Student Loans
in Bankruptcy? – Not So Fast, F
EINLAWYER.COM (Feb. 22, 2018), https://feinlawyer.com/
education-department-reviewing-discharge-student-loans-bankruptcy-not-fast [https://perma.cc/
5H44-RGAW] (“As of now, it is almost impossible to discharge student loans in bankruptcy.”);
Refinancing Student Loans To Avoid Bankruptcy, S
IMON, RESNICK, HAYES LLP, https://
www.simonresnik.com/chapter-13/refinancing-student-loans-avoid-bankruptcy [https://perma.cc/
2WHH-DKEK] (“[P]rivate student loan debt [is] . . . almost completely (except for extreme
cases) nondischargeable in bankruptcy.”); John Rose, Are Student Loans Dischargeable in
Bankruptcy?, R
OSE L. OFF., https://www.johnwrose.com/Articles/Are-student-loans-dischargeable
-in-bankruptcy.shtml [https://perma.cc/DM3W-9ZV9] (“When the current bankruptcy law went
into effect in 2005, it became nearly impossible to discharge student loans in bankruptcy.”); Eric
M. Wilson, Tuscaloosa Student Loan and Tax Debt Relief Lawyer, E
RIC WILSON L., LLC, http://
www.ericwilsonlaw.com/Bankruptcy/Student-Loans-Tax-Debt.html [https://perma.cc/8BQL-HJ4J]
(“It is almost impossible to discharge student loans through bankruptcy.”).
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514 DUKE LAW JOURNAL [Vol. 70:497
meaning of educational benefit between October 2005 and December
2019.
69
To identify the relevant set of cases, I used the “Bankruptcy
Dockets Search” function on Bloomberg Law to run a “Dockets &
Documents” query for any docket materials that used the phrase
“educational benefit” at least three times and also referenced either
educational debt or student loans.
70
Because the term “educational
benefit” appears twice in § 523(a)(8), I required at least three mentions
to ensure that documents that quoted the statute but lacked any
additional discussion of the term were excluded from the search results.
To filter out irrelevant results, I read through the docket for each of
these cases. Many focused on the issue of undue hardship, not the
scope of the educational benefit exemption. And a number of others
involved issues unrelated to the dischargeability of student loan debt.
71
Through this filtering process, I narrowed the set of cases to those
that addressed the meaning of educational benefit. I counted a case as
addressing the issue if either party advanced an argument regarding
the scope of the educational benefit exemption in any court filing or if
the court discussed the meaning of the phrase in its opinion. To serve
as a partial check on Bloomberg Law, I also ran the same search query
on Westlaw. Between these two protocols, thirty-nine cases met the
criteria for inclusion in the dataset.
72
It bears noting that this search methodology is not comprehensive.
Because Westlaw only searches judicial opinions and because
Bloomberg Law does not run a full-text search on every document filed
in the bankruptcy courts, some relevant cases likely failed to turn up in
either set of results.
73
That said, the low number of cases is consistent
69. The start date was chosen to coincide with the effective date of the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (codified as
amended in scattered sections of 11 U.S.C.).
70. The precise query is as follows: (“student loan!” OR “educational debt!” OR
“educational loan!”) AND atleast3(“educational benefit”).
71. Many of these cases focused on the scope of 11 U.S.C. §§ 523(a)(8)(A)(i) or
§ 523(a)(8)(B) (2018), but did not discuss the meaning of § 523(a)(A)(ii). I excluded those cases
in which both debtors were individuals. There were very few of these cases, but generally, these
disputes involved two family members in a debtor–creditor relationship. See, e.g., In re Nypaver,
581 B.R. 431, 431–32 (Bankr. W.D. Pa. 2018).
72. Several other cases are ongoing, but because they have not reached a resolution, they
are not included in the dataset.
73. Unfortunately, the only way to conduct a comprehensive search would be to manually
examine the PACER filings for every adversary proceeding. And given the large number of
adversary proceedings, that method would have increased the workload almost a hundredfold.
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both with prior research on student loan undue hardship proceedings
74
and with the data on student loan adversary proceedings presented
later in this Article.
75
Of these thirty-nine disputes, thirty-two were resolved by a
judicial ruling on the merits; one ended with a default judgment in
favor of the debtor; and another six concluded with settlement
agreements. In the cases where judges ruled on the merits, creditors
were highly successful, winning more than 80 percent of the time. In
light of the case law discussed in previous research, that win rate is
unsurprising.
76
But the question motivating this data collection is not
“Who wins?” but rather “Why do they win?” Digging deeper into the
cases reveals that the answer is not because creditors have the better
arguments but rather because most courts fail to hear debtors’ best
arguments.
Table 1 shows the strength of the link between the arguments
debtors raise and the discharge outcomes they receive. As the table
reveals, debtors won—or agreed to confidential settlements—in every
case in which they offered arguments in support of the Narrow
Reading. Conversely, they lost every case—except one—in which they
failed to propose the Narrow Reading. In the single outlier, the debtor
prevailed because the judge endorsed the Narrow Reading after
conducting his own examination of the issue.
77
74. See Iuliano, Empirical Assessment, supra note 1, at 505 (finding that only 0.1 percent of
student loan debtors in bankruptcy seek to discharge their educational debts).
75. See infra Part II.B. Between 2011 and 2019, there were an average of 573 student loan
adversary proceedings per year. See infra tbl.2. Educational benefit cases are, however, only a
small part of this total. More precisely, given the composition of all student loan debt, one would
expect approximately 2 percent of these adversary proceedings to address the meaning of
educational benefit—this approximation is derived from dividing the approximately $1.7 trillion
in total student loan debt by the roughly $50 billion that is subject to the educational benefit
discussion. See Teddy Nykiel, 2020 Student Loan Debt Statistics, N
ERDWALLET (Sept. 23, 2020),
https://www.nerdwallet.com/blog/loans/student-loans/student-loan-debt [https://perma.cc/PL58-
H3YB] (noting that $1.67 trillion is owed in federal and private student loan debt as of June 2020);
Alexander Gladstone, Appeals Court Weakens Bankruptcy Protections for Private Student Loans,
W
ALL ST. J. (Sept. 1, 2020, 4:57 PM), https://www.wsj.com/articles/appeals-court-weakens-
bankruptcy-protections-for-private-student-loans-11598993841 [https://perma.cc/222G-RXCY]
(noting that “[r]oughly $50 billion of outstanding private student debt” is subject to the
“educational benefit” dispute).
76. See Iuliano, Student Loan Bankruptcy, supra note 17, at 289–301.
77. See Nunez v. Key Educ. Res./GLESI (In re Nunez), 527 B.R. 410, 413–15 (Bankr. D. Or.
2015) (discussing the merits of the Narrow Reading). Given the judge’s extensive treatment of
the issue in his opinion, it seems likely that the Narrow Reading was addressed during oral
argument.
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TABLE 1: DEBTORS’ ARGUMENTS AND DISCHARGE OUTCOMES
Did debtor propose Narrow Reading?
Discharge
Yes No
Yes 12
*
1
No 0 26
* This
f
igure includes five rulings on the merits, six stipulated
discharges, and one default judgment.
In contrast to the debtors, creditors won only those cases in which
debtors conceded the accuracy of the Broad Reading. For these cases,
the debtors’ strategies involved challenging the application of the
Broad Reading to the specific loans in dispute.
78
Most frequently, their
arguments focused on whether educational benefit referred to the
loan’s stated purpose or the loan’s actual use.
79
Many borrowers argued
for the latter interpretation, claiming that their educational loans were
dischargeable because they used them for noneducational purposes.
This argument is nothing short of bizarre. By its logic, if a debtor
took out an educational loan to pay for tuition but proceeded to use
the funds to purchase a car, the debt would be dischargeable. But if
that same debtor took out an educational loan to pay for tuition and
actually used it to pay for tuition, the debt would be nondischargeable.
For obvious reasons, courts have found this line of argument
unpersuasive.
80
Nonetheless, debtors keep raising claims like this, and that has
proven beneficial to student loan creditors. Each time they win,
78. See, e.g., Reply Brief for Appellant at 6–9, Desormes v. Charlotte Sch. of L. (In re
Desormes), 497 B.R. 390 (Bankr. D. Conn. 2012) (No. 10-50079) (conceding the Broad Reading
and focusing on the question of whether the funds were received).
79. See, e.g., Maas v. Northstar Educ. Fin., Inc. (In re Maas), 497 B.R. 863, 869 (Bankr. W.D.
Mich. 2013) (“Although the breadth of this term has been the subject of some debate, a majority
of courts determine whether a loan qualifies as an ‘educational benefit’ by focusing on the stated
purpose for the loan when it was obtained, rather than on how the loan proceeds were actually
used.”).
80. See Navient Sols., LLC v. Crocker (In re Crocker), 585 B.R. 830, 836 (Bankr. S.D. Tex.
2018), aff’d in part, rev’d in part, 941 F.3d 206 (5th Cir. 2019). In Crocker, the court concluded that
“educational benefit” is to be read narrowly:
[The scope of educational benefit does] not include all loans that were in some way
used by a debtor for education. If such were the case, would not a loan for a car used
by a commuter student to travel to and from school every day be nondischargeable
under § 523(a)(8)(A)(ii)? The answer is obvious.
Id.
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creditors have another case they can point to in support of the Broad
Reading. As the list of supportive precedent expands, the perception
that the issue is settled grows stronger, and the argument itself becomes
more compelling. Creditors are aware of this fact and have worked to
ensure that the precedent weighs in their favor. They have done so not
only by litigating cases that are likely to bolster favorable precedent
but by settling cases that are likely to result in adverse precedent.
Indeed, in every single case that settled, the debtors advanced
arguments supporting the Narrow Reading.
81
As the data illustrate,
proposing the Narrow Reading is a virtual prerequisite for obtaining a
favorable outcome.
One point worth emphasizing is that the debtors who argued for
the Narrow Reading and those who failed to do so had similar student
loan obligations. In only 8 percent of the cases, borrowers had debts
that would be exempt from discharge under the Narrow Reading.
82
Despite this, borrowers lost 67 percent of the cases—more than eight
times the rate one would expect if the issues had been adequately
briefed. Although that disparity highlights a notable access-to-justice
gap, it is not the most significant problem. The far greater issue is the
small number of cases that are filed.
To put the extent of this shortfall into perspective, consider the
following: each year, several thousand debtors with student loans that
are not qualifying debts under § 523(a)(8) file for bankruptcy.
83
But
each year, fewer than five of those debtors bring forward cases to
request a discharge.
84
In percentage terms, fewer than 1 percent of the
educational benefit cases that should be filed are actually filed.
Regardless of the exact number, the key point is that few individuals
with dischargeable student loans recognize that those debts are, in fact,
dischargeable.
81. See, e.g., Plaintiff’s Notice of Hearing and Motion for Partial Summary Judgment at 7–
10, Ferguson v. Navient Sols., LLC (In re Ferguson), No. 17-04051 (Bankr. D. Minn. July 25, 2017)
(advocating a narrow construction of § 523(a)(8)).
82. See Chi. Patrolmen’s Fed. Credit Union v. Daymon (In re Daymon), 490 B.R. 331, 335–
37 (Bankr. N.D. Ill. 2013) (finding that an employer-sponsored tuition assistance program—in
which the debtor received tuition reimbursement in exchange for agreeing to work for the
employer for a fixed period of time—conferred a nondischargeable educational benefit); Omaha
Joint Elec. Apprenticeship & Training Comm. v. Stephens (In re Stephens), No. 10-8056, 2011
WL 672000, at *3–4 (Bankr. D. Neb. Feb. 17, 2011) (same); Sensient Techs. Corp. v. Baiocchi (In
re Baiocchi), 389 B.R. 828, 830–32 (Bankr. E.D. Wis. 2008) (same).
83. This number is an estimate derived from the fact that approximately 2 percent of
outstanding student loan debt falls into this category. See supra note 75.
84. See supra notes 69–72 and accompanying text.
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2. Theory. The existence of an access-to-justice gap in the student
loan bankruptcy system is unfortunate, but given the litigation
incentives, it is not surprising. This situation is a paradigmatic example
of the case-selection strategy that Marc Galanter identifies in his
landmark law and society article, “Why the ‘Haves’ Come out
Ahead.”
85
In that piece, Galanter divides litigants into two groups:
repeat players and one-shotters.
86
Repeat players are those who engage
in many similar cases over time.
87
One-shotters are those who have
isolated interactions with the judicial system.
88
Because one-shotters do
not expect to find themselves in court again, they are concerned only
with the outcome in the present case.
89
Repeat players, by contrast,
take a long-term view, which enables them to trade off immediate gains
to obtain greater gains in subsequent cases.
90
These incentives make it
such that repeat players care greatly about the establishment of
favorable precedent, and one-shotters do not care at all. By capitalizing
on these divergent interests, repeat players are able to engage in a case-
selection strategy designed to cultivate favorable precedent, even in
the absence of strong legal arguments.
91
As experience has proven, the repeat-player/one-shotter model is
more than an abstract theory. Its insights explain litigation strategy in
a large number of domains.
92
From plea negotiations between
85. See generally Marc Galanter, Why the “Haves” Come Out Ahead: Speculations on the
Limits of Legal Change, 9 L
AW & SOC’Y REV. 95 (1974) (explaining how litigants who expect to
be involved in many cases on a single issue have different incentives than litigants who expect to
be involved in only one case).
86. See id. at 97.
87. See id. (defining repeat players as those “who are engaged in many similar litigations
over time”).
88. See id. (defining one-shotters as “claimants who have only occasional recourse to the
courts”).
89. See Catherine Albiston, The Rule of Law and the Litigation Process: The Paradox of
Losing by Winning, 33 L
AW & SOC’Y REV. 869, 873 (1999) (“One-shot players who do not expect
to litigate again are more likely to . . . trad[e] the possibility of making ‘good law’ for tangible
gain—because they may not value a favorable legal opinion for future disputes.”).
90. See Galanter, supra note 85, at 100 (discussing repeat players’ incentives to “play for
rules in litigation itself”).
91. See Lynn M. LoPucki & Walter O. Weyrauch, A Theory of Legal Strategy, 49 D
UKE L.J.
1405, 1450–52 (2000) (discussing how repeat players can employ this case-selection strategy to
“pressur[e] judges into a favorable resolution of a case without entirely persuading them to it”).
92. See generally, e.g., Donald R. Songer, Reginald S. Sheehan & Susan Brodie Haire, Do
the ‘Haves’ Come Out Ahead over Time? Applying Galanter’s Framework to the Decisions of the
U.S. Courts of Appeals 1925–1988, 33 L
AW & SOC’Y REV. 811 (1999) (examining decisions in the
federal courts of appeals from 1925 through 1988 and finding support for Galanter’s hypothesis
that repeat players are more likely to win).
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prosecutors and defendants, to labor disputes between employers and
employees, to contract issues between businesses and consumers, the
model illustrates how repeat players are able to game the system to
their advantage.
93
The data in this study show that student loan bankruptcy litigation
is another area in which the theory has strong explanatory power.
94
As
the repeat players in this scenario, student loan creditors have taken a
long-term view with respect to their litigation strategy.
95
Because they
expect to be involved in similar disputes in the future, creditors quickly
settle cases that could yield adverse precedent and aggressively litigate
cases that are likely to yield beneficial precedent.
96
In fact, their
incentives are such that they are willing to devote substantial resources
to a single case when doing so will deter subsequent litigation or make
it easier to win the cases that are brought.
Student loan debtors, by contrast, follow the one-shotter playbook
and, accordingly, have no interest in the outcome of future litigation.
For them, everything turns on the disposition of just one case.
97
This
single-minded focus influences debtors’ strategic decisions in two
important respects. First, it promotes risk-averse behavior. Because
debtors are unable to average their wins and losses across a set of cases
and because the stakes are high relative to their net worth, debtors are
incentivized to accept settlement offers below their case’s expected
value.
98
Second, because debtors do not expect to be involved in similar
disputes in the future, they ignore the precedential effects that their
93. See, e.g., Albiston, supra note 89, at 898 (examining employment litigation involving the
Family and Medical Leave Act of 1993 and finding support for Galanter’s hypothesis that repeat
players fare better).
94. See supra Part II.A.1.
95. Cf. Galanter, supra note 85, at 103 (noting “the superior opportunities of the [repeat
player] to trigger promising cases and prevent the triggering of unpromising ones”).
96. See id. at 101 (“We would then expect [repeat players] to ‘settle’ cases where they
expected unfavorable rule outcomes. Since they expect to litigate again, [repeat players] can select
to adjudicate (or appeal) those cases which they regard as most likely to produce favorable
rules.”).
97. See Janet Cooper Alexander, Do the Merits Matter? A Study of Settlements in Securities
Class Actions, 43 S
TAN. L. REV. 497, 534 (1991) (“One-shot players who expect to be involved in
only one litigation will not realize such benefits [from establishing favorable precedent]. For them,
there is no long run; there is only now.”).
98. Cf. id. at 533–34 (noting that, unlike one-shotters, “[r]epeat players can afford to ‘play
the averages’ and treat each case according to its expected value because gains will offset losses
over time”).
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cases will have on subsequent litigation.
99
This incentive structure
accrues to the benefit of creditors by skewing precedent in their favor
and by allowing them to settle unfavorable cases on favorable terms.
100
The unwarranted advantages of this repeat-player strategy are
even more salient when one considers that student loan creditors,
themselves, harbor doubts as to the veracity of the Broad Reading. In
disclosure statements for the Securities and Exchange Commission
(“SEC”), student loan creditors have repeatedly warned investors that
many types of private student loans may be dischargeable in
bankruptcy. For example, in its prospectus for a $1.5 billion student
loan securitization, Sallie Mae stated that the “risk of bankruptcy
discharge of private credit student loans” is a factor investors should
“carefully consider . . . in deciding whether to purchase any notes.”
101
Providing further details, Sallie Mae advised that
[p]rivate credit student loans made for qualified education expenses
are generally not dischargeable by a borrower in bankruptcy . . . [but]
direct-to-consumer loans are disbursed directly to the borrowers
based upon certifications and warranties contained in their
promissory notes . . . . This process does not involve school
certification as an additional control and, therefore, may be subject to
some additional risk that the loans are not used for qualified education
expenses. If you own any notes, you will bear any risk of loss resulting
from the discharge of any borrower of a private credit student loan to
the extent the amount of the default is not covered by the trust’s credit
enhancement.
102
According to Sallie Mae’s own financial disclosures, private student
loans that are not used for qualified education expenses may be
dischargeable in bankruptcy. Navient, a spin-off of Sallie Mae and
major student-loan servicing company in its own right, has issued
similar advisements in its SEC filings. In a 2014 offering memorandum,
for instance, the company warned investors that a key risk factor is the
99. See Galanter, supra note 85, at 102 (arguing that one-shotters “should be willing to trade
off the possibility of making ‘good law’ for tangible gain”).
100. See id. (“[W]e would expect the body of ‘precedent’ cases—that is, cases capable of
influencing the outcome of future cases—to be relatively skewed toward those favorable to
[repeat players].”).
101. SLM
STUDENT LOAN TRUST 2008-1, PROSPECTUS SUPPLEMENT TO BASE PROSPECTUS
DATED OCTOBER 16, 2007, at 20, 33 (2008), https://www.navient.com/assets/about/investors/
debtasset/SLM-Loan-Trusts/06-10/2008-1/20081.pdf [https://perma.cc/99GW-4JUU].
102. Id. at 33 (emphasis added).
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“bankruptcy discharge of career training loans.”
103
As Navient
explained,
Career training loans are generally dischargeable by a borrower in
bankruptcy. If you own any notes, you will bear any risk of loss
resulting from the discharge of any borrower of a career training loan
to the extent the amount of the default is not covered by the trust’s
credit enhancement.
104
Interestingly, in its court briefs, Navient firmly claimed that loans not
used for qualified education expenses, such as career training loans, are
exempt from discharge and argued that reading the statute otherwise
“makes no sense” and “ignore[s] clear Congressional instruction.”
105
When faced with possible liability for issuing material misstatements to
investors,
106
Navient emphasizes the dischargeability of student loans.
But when making arguments in court, Navient wholly disclaims that
position, arguing that such loans are clearly nondischargeable.
With respect to educational benefit litigation, creditors have used
their status as repeat players to great advantage. Through careful case
selection, they have managed not only to develop favorable precedent
but to do so with such success that few debtors have been willing to
challenge the Broad Reading’s expansive interpretation. Despite
having the weaker legal arguments, student loan creditors have been
the clear victors.
B. Is There Undue Hardship?
In step two of the student loan discharge analysis, the court must
evaluate whether the student loan would “impose an undue hardship
on the debtor and the debtor’s dependents.”
107
As discussed in Part I,
most courts in the United States have adopted the Brunner test—a
standard that requires debtors to establish three elements to prove
undue hardship: (1) a current inability to repay the loans, (2) a future
103. NAVIENT OFFERING MEMORANDUM, at S-29 (2014), https://www.navient.com/assets/
NAVSL%202014-CT%20-%20Offering%20Memorandum%20-%20As%20Printed.pdf [https://
perma.cc/58Y6-ZPHD].
104. Id. (emphasis added).
105. See, e.g., Opening Brief of Appellants at 27–28, Crocker v. Navient Sols., LLC (In re
Crocker), 941 F.3d 206 (5th Cir. 2019) (No. 18-20254).
106. See 15 U.S.C. § 78j (2018).
107. 11 U.S.C. § 523(a)(8) (2018).
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inability to repay the loans, and (3) a good faith effort to repay the
loans.
108
These prongs are best thought of as three temporal dimensions—
present, future, and past, respectively—of a single analysis. The first
prong evaluates the debtor’s present circumstances to determine
whether the debtor has sufficient income or resources to make
payments on her student loans today. The second prong examines the
debtor’s future circumstances to assess whether the debtor’s financial
situation is likely to improve such that she will be able to repay her
student loans in the future. And finally, the third prong is backward-
looking and asks whether the debtor made payments on her student
loans when her financial circumstances allowed in the past.
109
As for the precise meaning of these elements, the available
precedent seems to tilt in favor of creditors. At the extreme, a few
courts require the debtor to show a “certainty of hopelessness” to
satisfy the first two prongs.
110
Striking a similarly harsh tone, other
courts mandate “a total incapacity now and in the future to pay.”
111
Some courts take a more measured approach, holding that utter
hopelessness is not necessary.
112
Even so, these courts acknowledge the
strict nature of the undue hardship test and emphasize that a discharge
is not permitted “merely because repayment of the borrowed funds
would require some major personal and financial sacrifices.”
113
Although the dominant precedent is consistent with the myth of
nondischargeability, the step one analysis demonstrates that precedent
108. Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987) (per
curiam).
109. For detailed treatment of these elements, see Rafael I. Pardo & Michelle R. Lacey, The
Real Student-Loan Scandal: Undue Hardship Discharge Litigation, 83 A
M. BANKR. L.J. 179, 196–
200 (2009).
110. See, e.g., Oyler v. Educ. Credit Mgmt. Corp. (In re Oyler), 397 F.3d 382, 386 (6th Cir.
2005) (holding that the Brunner test requires a “certainty of hopelessness” (quoting In re
Roberson, 999 F.2d 1132, 1136 (7th Cir. 1993))); O’Hearn v. Educ. Credit Mgmt. Corp. (In re
O’Hearn), 339 F.3d 559, 564 (7th Cir. 2003) (same).
111. See, e.g., Pa. Higher Educ. Assistance Agency v. Faish (In re Faish), 72 F.3d 298, 307 (3d
Cir. 1995) (quoting In re Brunner, 46 B.R. 752, 758 (S.D.N.Y. 1985)).
112. See, e.g., Educ. Credit Mgmt. Corp. v. Howe (In re Howe) 319 B.R. 886, 889–90 (B.A.P.
9th Cir. 2005) (holding that courts must “conduct[] an individualized analysis of debtor’s expenses
[under]
§ 523(a)(8)”); Educ. Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302, 1310 (10th Cir. 2004) (“[C]ourts
need not require a ‘certainty of hopelessness.’ Instead, a realistic look must be made into debtor’s
circumstances and the debtor’s ability to provide for adequate shelter, nutrition, health care, and
the like.”).
113. Howe, 319 B.R. at 889–90 (quoting Faish, 72 F.3d at 305–06).
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does not always tell the full story. Actual case outcomes can reveal a
very different legal landscape. Because many cases do not reach a
judicial ruling on the merits, identifying how those disputes are
resolved is necessary to understanding the entire spectrum of
outcomes. And as the remainder of this section will show, those
nonprecedential cases evidence a strong pattern of strategic settlement
on the part of creditors.
1. Data. Despite being a consistent topic of public interest, student
loan data is hard to come by—particularly data relating to undue
hardship challenges. To help fill that gap, I have compiled a nationwide
set of student loan bankruptcy cases. Specifically, my dataset includes
every student loan undue hardship proceeding filed in 2017: 447 cases
in total.
Throughout this process, I used Bloomberg Law’s Bankruptcy
Docket search function. Because student loan adversary proceedings
have a specific tag known as a “Nature of Suit Code,”
114
I was able to
reliably locate the relevant set of cases. Once the cases were located, I
coded them along a number of dimensions, paying particular attention
to the arguments made in the complaint, the answer, and the ultimate
disposition of the proceeding. Figure 2 depicts the primary results of
this process.
F
IGURE
2:
S
TUDENT
L
OAN
B
ANKRUPTCY
O
UTCOMES IN
2017
*10 cases are still pending
114. The specific Nature of Suit code is 63: Dischargeability - 523(a)(8), student loan.
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The numbers in the flow chart are rather striking. In 2017, there
were 241,000 student loan debtors who filed for bankruptcy. Of those,
however, only 447 filed an adversary proceeding to request an undue
hardship determination. In other words, more than 240,000 debtors
conceded defeat without even asking the court to review their case. As
the outcomes at the bottom of Figure 2 suggest, the decision to forgo
an adversary proceeding was likely a poor decision for many of these
people.
Contrary to what the prevailing wisdom would predict, those 447
debtors who filed adversary proceedings were highly successful. To
date, 437 of those adversary proceedings have been closed, and 266 (61
percent) of those resulted in the eliminations of at least some of the
borrower’s student loan debt. This statistic, of course, raises the
question: Why aren’t more debtors bringing adversary proceedings?
One might think that these successful debtors were in particularly bad
financial situations. If that were true, the expectation would be for few
people to file because the financial hurdles to proving undue hardship
are so high.
In a previous article, however, I ruled out this possibility.
115
Successful debtors neither exhibit unusual financial distress nor do they
possess other characteristics that would make them especially well
suited to proving undue hardship. In fact, along the most important
financial and medical dimensions, successful debtors look very much
like the broader set of 240,000 student loan debtors who failed to even
file an adversary proceeding.
116
The answer to the question of why there are so few adversary
proceedings lies in a different domain. The reason does not have to do
with qualities specific to the debtors but rather has to do with the
distribution of case outcomes. Take a look at the number of judicial
rulings on the merits. There were only 41. That is a small number, but,
even more notably, 36 (85 percent) of those rulings went against the
debtor, yielding a denial of discharge.
That statistic is even more surprising in light of the high number
of settlements. If the law on the ground were actually so hostile to
debtors, one would not expect settlements to swamp judicial rulings on
115. See Iuliano, Empirical Assessment, supra note 1, at 523–26 (finding that at least 30
percent of the student loan debtors who fail to file an adversary proceeding are faring as poorly
financially and medically as the debtors who received a discharge).
116. See id. at 524 (concluding that more than 99 percent of the debtors who would have been
likely to prove undue hardship failed to file an adversary proceeding).
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the merits by a margin of 234 to 41. This striking ratio leads back to
Galanter’s repeat-player/one-shotter model of litigation. It appears
that the student loan creditors are both aggressively litigating cases that
they believe they will win and quickly settling cases that may yield
adverse precedent.
This strategy, coupled with the low filing rate for adversary
proceedings, suggests the following process: (1) any attorney who
reviews the case law sees precedent that is stacked against debtors and
concludes that few borrowers can prove undue hardship; (2) based on
the judicial rulings, attorneys counsel their clients not to pursue student
loan discharges; and (3) student loan debtors follow their attorneys’
advice and decide not to file adversary proceedings. Those steps lead
to the current situation where almost no one pursues undue hardship
relief. As the full set of outcomes shows, however, this attorney advice
is flawed. This Article explores these points more fully in the following
Section. For now, though, the focus is on the data in Table 2.
TABLE 2: STUDENT LOAN BANKRUPTCY PROCEEDINGS BY YEAR
Year
Filers with
Student Loans
Estimated Filers with
Undue Hardship
Adversary
Proceedings
2011 454,000 132,000 643
2012 390,000 113,000 736
2013 343,000 99,000 690
2014 299,000 87,000 685
2015 250,000 73,000 674
2016 246,000 71,000 604
2017 241,000 70,000 447
2018 222,000 64,000 404
2019 221,000 64,000 273
This table illustrates the true breadth of the Student Loan
Bankruptcy Gap. The first column details the number of student loan
borrowers who file bankruptcy each year.
117
As the table shows, more
117. The data for the first column in Table 2 are derived from the following sources: Brown,
supra note 32; June 2018 Bankruptcy Filings Fall 2.6 Percent, U.S.
CTS. (July 24, 2018),
https://www.uscourts.gov/news/2018/07/24/june-2018-bankruptcy-filings-fall-26-percent [https://
perma.cc/VV6J-6SXP]; June 2019 Bankruptcy Filings Fall 0.3 Percent, U.S. CTS. (July 26, 2019),
https://www.uscourts.gov/news/2019/07/26/june-2019-bankruptcy-filings-fall-03-percent [https://
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than 2.5 million people with educational debt filed for bankruptcy over
the past decade. The second column charts the number of those student
loan borrowers in bankruptcy who would have been able to prove
undue hardship if they filed an adversary proceeding and requested a
judicial determination.
118
For the last decade, that figure totals about
one million individuals. Finally, the third column lists the number of
student loan adversary proceedings that are actually filed each year.
119
For the entire decade, that figure totals a mere five thousand.
Taking the columns together, the data show that one million
people who filed for bankruptcy could have received a student loan
discharge, but only five thousand people tried. As stated in the
introduction, more than 99 percent of student loan borrowers who
were likely to prove undue hardship gave up without even trying. The
Student Loan Bankruptcy Gap is real, and it has hurt, at a minimum,
one million individuals.
2. Theory. In analyzing the results for the first step of the student
loan analysis, this Article noted strong support for the repeat-
player/one-shotter model of litigation.
120
And, as touched on in the
preceding Subsection, the data for the second step of the student loan
analysis provide further evidence of manipulative behavior on the part
of repeat-player creditors.
perma.cc/9UQY-E8ZE]; Just the Facts: Consumer Bankruptcy Filings, 2006–2017, U.S. CTS. (Mar.
7, 2018), https://www.uscourts.gov/news/2018/03/07/just-facts-consumer-bankruptcy-filings-2006-
2017 [https://perma.cc/B4YX-PQV7]. These estimates are consistent with data from the 2007
Consumer Bankruptcy Project, suggesting that the percentage of debtors in bankruptcy who have
student loan debt has remained constant over the last decade. See Iuliano, Empirical Assessment,
supra note 1, at 504.
118. This estimate comes from an earlier article of mine. There, I compared individuals who
successfully discharged their student loans with individuals who filed bankruptcy but declined to
pursue a student loan discharge. Based on those numbers, I was able to determine the number of
bankrupt debtors who could have discharged their student loans if they had taken the appropriate
legal steps. See Iuliano, Empirical Assessment, supra note 1, at 504–07, 512–26. By combining
newly collected data from column one along with data from one of my earlier articles, I was able
to determine the number of student loan debtors in bankruptcy over the last decade who would
have been able to prove undue hardship if they had attempted to do so. See id. at 523–25
(comparing debtors who received student loan discharges with debtors who did not file an
adversary proceeding to estimate the percentage of nonfiling debtors who would be likely to
prove undue hardship).
119. I gathered the data for this column by searching the Bloomberg Law bankruptcy dockets
for any case tagged with the student loan Nature of Suit code (63: Dischargeability - 523(a)(8),
student loan) during the applicable time period.
120. See supra Part II.A.2.
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Specifically, there are two key aspects to the data that, when
combined, illustrate a clear pattern of strategic settlement. First, the
ratio of settlements (234) to judicial rulings on the merits (41) is
striking. There were nearly six times as many settlements as decisions
on the merits. This fact alone is not dispositive of strategic settlement.
It could, of course, be explained by risk aversion among both sets of
litigants. Hence the importance of the second key aspect of the data:
the ratio of judicial rulings finding undue hardship (6) to those denying
the presence of undue hardship (35).
In short, repeat-player creditors won 85 percent of the cases that
had a judicial ruling on the merits. This is true even though debtors
received student loan relief in a significant majority of cases. This
distribution is far from what one would expect in a fair litigation system
in which both sides had equal representation and brought equal
funding to the legal battle. Winning 85 percent of the judicial rulings
on the merits while losing a significant majority of cases that are
brought is an unusual feat. This distribution can best be explained by
strategic settlement.
Student loan creditors are able to identify which discharge cases
they will win and aggressively litigate those disputes to obtain
favorable precedent. At the same time, these creditors offer generous
settlements to debtors who are likely to prevail on the merits.
121
Given
debtors’ one-shotter status and their corresponding risk aversion, they
are eager to accept settlements. Ultimately, this dual-pronged
approach allows creditors to develop significant favorable precedent
while eliminating the potential for any unfavorable precedent.
122
Although troubling, this outcome should not be surprising.
123
Strategic settlement is, after all, a core prediction of Galanter’s repeat-
121. See Einer R. Elhauge, Does Interest Group Theory Justify More Intrusive Judicial
Review?, 101 Y
ALE L.J. 31, 78 (1991) (“The adversarial structure of litigation . . . permits parties
to settle strategically in cases where the type of judge or set of facts seems likely to lead to
unfavorable precedent.”).
122. See Frank B. Cross, In Praise of Irrational Plaintiffs, 86 C
ORNELL L. REV. 1, 29 (2000)
[hereinafter Cross, Irrational Plaintiffs] (writing that settlement-encouraging policies “facilitate
strategic settlement and precedent manipulation by repeat players with noneconomic motives to
deter litigation”).
123. See Martin J. Bailey & Paul H. Rubin, A Positive Theory of Legal Change, 14 I
NT’L REV.
L. & ECON. 467, 469–74 (1994) (developing a model showing that parties with a greater interest
in precedent will prevail more often in setting precedent).
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528 DUKE LAW JOURNAL [Vol. 70:497
player/one-shotter model:
Repeat players will not allow the marginal cases to go to trial or
judgment, because those cases present a real risk of creating adverse
precedent. Instead, repeat players will push cases they are likely to
win and settle the marginal cases. Hence, this [] hypothesis predicts
that such repeat players will prevail in a disproportionate number of
cases.
124
The pattern described here is, of course, identical to the results
depicted in the student loan data. Creditors have won not just a
disproportionate number of litigated cases, but every single litigated
case.
125
At the same time, however, creditors have shown their
willingness to settle disputes that may lead to adverse precedent. All
told, settlements outnumber litigated cases by a ratio of eight to one.
This distribution is strong evidence of strategic settlement.
126
Notably, strategic settlement may not always be beneficial to the
repeat player. If they miscalculate the value of favorable precedent, the
repeat player could end up paying more in settlement fees. In line with
that thinking, the pattern here raises another question: If eight times as
many cases are being settled as are being litigated, are the creditors
truly coming out ahead?
When viewed in a certain light, the calculus appears questionable.
Given that there were only 447 adversary proceedings in 2017, agreeing
to settle 234 of those seems a high price to pay. After all, if there are
only a few hundred cases a year, how much is favorable precedent
124. Cross, Decisionmaking, supra note 67, at 1493.
125. Subsequent economic analyses of litigation have reinforced and confirmed Galanter’s
hypothesis. See generally, e.g., Robert Cooter & Lewis Kornhauser, Can Litigation Improve the
Law Without the Help of Judges?, 9 J.
LEGAL STUD. 139 (1980) (presenting a model of litigation
in which the party with the greater stake in precedent is more likely to win); William M. Landes
& Richard A. Posner, Adjudication as a Private Good, 8 J.
LEGAL STUD. 235 (1979) (discussing
the ways in which “parties’ decision [to litigate or settle] may be affected by the precedential
character of the decision in their case”).
126. In commenting on Galanter’s article, Richard Lempert noted that:
[T]heory tells us that the mix of cases heard by appellate courts is dominated by cases
that “haves” have selected because they are likely to win. Missing from the mix are
potentially important, precedent-setting cases that “have nots” are likely to win. When
a “have not” threatens to appeal such a case, the “have,” motivated by his or her
interest as a repeat player, typically settles, on the plaintiff’s terms if necessary, to
prevent the appellate court from setting an adverse precedent.
Richard Lempert, Comment, A Classic at 25: Reflections on Galanter’s “Haves” Article and Work
It Has Inspired, 33 L
AW & SOC’Y REV. 1099, 1109 (1999). Although this excerpt focuses on
appeals, strategic settlement is just as effective when deployed at the initial stage of litigation. See
Albiston, supra note 89, at 873 (“Strategic settlement influences the ‘selection’ of cases presented
for adjudication by tending to select cases in which the repeat player is more likely to win.”).
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really worth to the creditors? The true value only becomes clear when
one steps back and looks at the broader set of disputes—in particular,
those adversary proceedings that could have been brought but were
not.
127
As discussed in the previous Section, Table 2 shows just how
substantial this number is. Each year, there are around 250,000
bankruptcy filers with student loans, and every single one represents a
potential adversary proceeding. Creditors fear this inundation of cases.
If the weight of precedent shifts and the myth of nondischargeability is
dispelled, student loan debtors will suddenly start filing adversary
proceedings en masse. Viewed from this perspective, the settlements
make clear economic sense. Losing money on a couple hundred cases
each year is a sound strategy if it deters hundreds of thousands of
litigants from pursuing discharge claims.
128
As the data illustrate, this process of strategic settlement has been
highly effective in the student loan bankruptcy context. It has played a
significant role in perpetuating the myth of nondischargeability. And,
by doing so, it has limited the number of student loan disputes to a few
hundred annually—no small feat given that millions of student loan
debtors are in need of financial relief.
III.
CLOSING THE GAP
A. Consequences of Inaction
Is there a student loan debt crisis? When people ask this question,
they tend to have a big-C Crisis in mind. They want to know whether
student loan debt is on par with the Subprime Mortgage Crisis that led
to the Great Recession.
129
Unsurprisingly, commentators come down
127. See Cross, Irrational Plaintiffs, supra note 122, at 13–14 (“[R]epeat players [make
settlement and vacatur] payments to rig the law for their benefit, and this demonstrates the
monetary value of a favorable settlement . . . .”); Jeffrey R. Seul, Settling Significant Cases, 79
W
ASH. L. REV. 881, 906 (2004) (“A strategic settlement of a significant case is not the type of win-
win, value-maximizing outcome that proponents of legal negotiation typically promise and
extol.”).
128. See Cross, Irrational Plaintiffs, supra note 122, at 7 (describing how a one-shotter’s
potential gain is “limited to the particular case,” while a repeat player’s “loss is equal to the value
associated with a series of related actions”).
129. See, e.g., Maurice Adams, US Higher Education Might Be a Bubble About To Burst,
O
BSERVER (Feb. 23, 2018), http://observer.case.edu/adams-us-higher-education-might-be-a-
bubble-about-to-burst [https://perma.cc/PU8Z-4MQM] (“Is U.S. higher education a bubble
about to burst, like the housing bubble burst that triggered the 2007-2008 financial crisis? That
strong possibility is now evident.”).
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on both sides of the issue. Some argue that total outstanding student
loan debt is too low to present a macroeconomic problem.
130
And
others see parallels with previous recessions and contend that student
debt will cause a global economic catastrophe.
131
In favor of this latter
position, one article in Fortune magazine describes a particularly grim
future:
The higher education bubble (one-sixth of the U.S. economy) will
likely burst with the force of all previous catastrophes combined—a
shock wave so sudden, so large, that it gathers the full force of the
savings and loan, insurance, energy, tech, and mortgage crashes,
creating a blockbuster-level perfect storm.
132
This sensationalistic prediction notwithstanding, the economic
data suggest that a student loan crisis, in the big-C sense, is an unlikely
event.
133
Admittedly, there are many similarities between the run-up to
the Great Recession and the current state of student loan debt: rapidly
growing debt balances, high default rates, and exorbitant borrowing by
individuals who have little hope of paying off their loans, to name just
a few.
134
130. See, e.g., Susan Dynarski, An Economist’s Perspective on Student Loans in the United
States 2 (Sept. 2014) (unpublished manuscript), https://www.brookings.edu/wp-content/uploads/
2016/06/economist_perspective_student_loans_dynarski.pdf [https://perma.cc/4KF3-K36Q]
(“[T]here is no debt crisis: student debt levels are not large relative to the estimated payoff to a
college education in the US. Rather, there is a repayment crisis, with student loans paid when
borrowers’ earnings are lowest and most variable.”); Jonathan D. Glater, Student Debt and the
Siren Song of Systemic Risk, 53 H
ARV. J. ON LEGIS. 99, 145 (2016) (“[D]efaults on student loans
are unlikely to cause the ripple effects caused by defaults on home loans in the period leading up
to the 2008 crisis.”).
131. See, e.g., Note, Ending Student Loan Exceptionalism: The Case for Risk-Based Pricing
and Dischargeability, 126 H
ARV. L. REV. 587, 606 (2012) (noting the harmful macroeconomic and
sociological effects of defaulting on student loans). See generally Jessica L. Gregory, The Student
Debt Crisis: A Synthesized Solution for the Next Potential Bubble, 18 N.C.
BANKING INST. 481
(2014) (arguing that student debt has reached a critical level and closely resembles the mortgage
crisis that led up to the Great Recession starting in 2008).
132. Jim Rogers & Robert Craig Baum, This Economic Bubble Is Going To Wreak Havoc
When It Bursts, F
ORTUNE (July 10, 2017, 1:51 PM), https://fortune.com/2017/07/10/higher-
education-student-loans-economic-bubble-federal [https://perma.cc/QYV9-2JNW].
133. See generally Glater, supra note 130 (arguing that student loan defaults are unlikely to
cause market instability).
134. See Jesse L. Noa, The Student Loan Bubble: A Pending Crisis or Overblown Threat?, 20
T
RINITY L. REV. 65, 79 (2014) (“[T]he causes of the student loan bubble reflect many of the
causes of the housing bubble. Negative incentives, government policy, investor pressure, and
greed are all playing a part in the run up of another possible crisis.”); Patrick B. Healey, We
Should All Be Concerned About the Student Debt Crisis, CNBC (Nov. 4, 2019, 10:01 AM), https://
www.cnbc.com/2019/11/04/we-should-all-be-concerned-about-the-student-debt-crisis.html [https://
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But despite these common features, there are several important
differences.
135
First, the magnitude of the debt is quite different. In the
lead-up to the Great Recession, mortgage debt hit $9.3 trillion.
136
At
present, student loan debt sits at $1.7 trillion—a large number but by
no means devastating on a national scale. Moreover, given that student
loan default rates hover around 11 percent, the total amount in default
is dwarfed by the amount of debt that was not being repaid during the
mortgage crisis.
137
Second, the vast majority of student loan debt, including most
student loan debt issued by private lenders, is federally guaranteed.
138
This means that the government already has a plan in place to handle
widespread defaults—which was not the case for the mortgage crisis.
The plan, of course, is a taxpayer bailout of the student loan industry,
which, though less than ideal, does guarantee that systemically
important banks will not fail because of student loan debt.
perma.cc/9DW4-MAKL] (“Much like the mortgage industry before the housing crisis, lenders are
extending credit to students without fully weighing their ability to repay the debt.”).
135. See Alan White, The Student-Loan Sweatbox, C
REDIT SLIPS (Feb. 26, 2018, 8:31 AM),
https://www.creditslips.org/creditslips/2018/02/the-student-loan-sweatbox.html [https://perma.cc/
PM5P-L7DA] (“Unlike the subprime mortgage bubble, the student loan bubble will not explode
and drag down the bond market, banks and other financial institutions.”).
136. See Harriet Torry, U.S. Mortgage Debt Hits Record, Eclipsing 2008 Peak, W
ALL ST. J.
(Aug. 13, 2019, 3:21 PM), https://www.wsj.com/articles/u-s-mortgage-debt-hits-record-eclipsing-
2008-peak-11565708431 [https://perma.cc/K2BJ-GU3X] (noting that the mortgage highpoint
during the Great Recession was $9.294 trillion in the third quarter of 2008).
137. See A Look at the Shocking Student Loan Debt Statistics for 2020, S
TUDENT LOAN HERO
(Jan. 15, 2020), https://studentloanhero.com/student-loan-debt-statistics [https://perma.cc/Y7X4-
9D37] (finding that “11.1% of student loans are 90 days or more delinquent or are in default”).
Nearly two-thirds of student loan debt would need to enter default for the numbers to be
comparable. See Lee E. Ohanian, Who Defaults on Their Mortgage, and Why? Policy Implications
for Reducing Mortgage Default, F
ED. RSRV. BANK OF MINNEAPOLIS (Sept. 13, 2017), https://
www.minneapolisfed.org/article/2017/who-defaults-on-their-mortgage-and-why-policy-
implications-for-reducing-mortgage-default [https://perma.cc/2DQY-WU2V] (“The default rate
on all mortgages rose from about 2 percent in 2006 to over 11 percent by 2011 . . . . ”); Mortgage
Debt Outstanding, All Holders (DISCONTINUED), E
CON. RSCH. FED. RSRV. BANK OF ST.
LOUIS (Dec. 12, 2019), https://fred.stlouisfed.org/series/MDOAH [https://perma.cc/P3XZ-
VGFR] (indicating that more than $13 trillion in mortgage debt was outstanding in 2011).
138. See Travis Hornsby, Student Loan Debt Statistics in 2020: A Look at The Numbers,
S
TUDENT LOAN PLANNER (July 18, 2020), https://www.studentloanplanner.com/student-loan-
debt-statistics-average-student-loan-debt [https://perma.cc/MQK8-JM5C] (reporting that, as of
December 2019, outstanding direct student loans total more than $1.25 trillion, outstanding
Federal Family Education Loans total more than $257 billion, and outstanding private loans total
nearly $125 billion); What Is a Federally Guaranteed Student Loan?, N
OLO,
https://www.nolo.com/legal-encyclopedia/what-is-federally-guaranteed-student-loan.html [https://
perma.cc/QFS4-GWSL] (discussing the Federal Family Education Loan program).
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Third, unlike with mortgage defaults, student loan defaults do not
lead to foreclosures or distressed asset sales. Even in default, most
student loans are profitable.
139
This fact owes to the extensive
collection tools that Congress has provided the U.S. Department of
Education. From administrative wage garnishments that collect 15
percent of a debtor’s after-tax incomes without a court order, to federal
income tax seizures, to nonpayment penalties, student loan creditors
have many methods at their disposal to ensure their loans are
profitable. This is perhaps why the federal government turns a profit
on its student loan portfolio.
140
Ultimately, there is little reason to think
that even the worst-case student loan outcome would cause problems
on the scale of the mortgage crisis.
However, just because a crisis on the order of the Great Recession
is not brewing does not mean that there is no reason to worry. Student
loan debt may not be a big-C macroeconomic crisis, but it is undeniably
a small-c microeconomic crisis. Specifically, there are a number of
trends that suggest student loan debt has been a heavy weight on
economic growth.
At the top level, Americans owe more than $1.7 trillion in student
loan debt
141
—a sixfold increase since 2003.
142
As you might expect,
growing numbers of borrowers are taking on greater debt burdens.
139. See James B. Steele & Lance Williams, Who Got Rich Off the Student Debt Crisis?,
R
EVEAL (June 26, 2018), https://www.revealnews.org/article/who-got-rich-off-the-student-debt-
crisis [https://perma.cc/6GZQ-4PKG] (“42 million people owe $1.3 trillion in student debt. It’s a
profit center for Wall Street and the government . . . . Today, just about everyone involved in the
student loan industry makes money off students—the banks, private investors, even the federal
government.”).
140. See Letter from Sen. Elizabeth Warren, to Arne Duncan, Sec’y, U.S. Dep’t of Educ. 1
(Feb. 25, 2015), https://www.warren.senate.gov/files/documents/2015_25_02_Letter_to_Secretary_
Duncan_re_Student_Loan_Profits.pdf [https://perma.cc/C6SC-TATV] (“[T]he Congressional
Budget Office’s most recent baseline indicates that the federal government is . . . expected to
produce $110 billion in profits from its student loans over the next decade.”); see also Matthew
M. Chingos, End Government Profits on Student Loans: Shift Risk and Lower Interest Rates,
B
ROOKINGS INST. (Apr. 30, 2015), https://www.brookings.edu/research/end-government-profits-
on-student-loans-shift-risk-and-lower-interest-rates [https://perma.cc/MJH5-2UF5] (discussing
the debate over the accounting methods used to determine government profits from student
borrowers).
141. See Student Loan Debt Clock, F
INAID, http://www.finaid.org/loans/studentloandebt
clock.phtml [https://perma.cc/9GNV-98HX] (estimating total student loan debt to be in excess of
$1.7 trillion).
142. F
ED. RSRV. BANK OF N.Y.C., QUARTERLY REPORT ON HOUSEHOLD DEBT AND
CREDIT (2020), https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/xls/
hhd_c_report_2020q1.xlsx [https://perma.cc/5H33-M4AK] (calculating the national student loan
debt burden to be $240 billion in the first quarter of 2003).
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Today, forty-five million Americans have student loan debt,
143
with an
average balance of $37,000.
144
Given increasing debt loads and
increased college enrollment, it should come as no surprise that the
number of student loan borrowers who cannot repay their loans is
increasing as well. There are now nearly eight million student loan
debtors in default.
145
Today, student loan debt accounts for 11 percent
of all household debt,
146
up from 4 percent a decade ago.
147
Although the general statistics tell an unfortunate story, the
problems are more severe for individuals from underrepresented
demographic groups. For instance, 90 percent of Black students and 72
percent of Latino students leave school with student loan debt,
compared with only 66 percent of white students.
148
The racial gap gets
even worse down the road. Ten years after graduation, white
borrowers have paid down 30 percent of their loan balances, but Black
borrowers owe 113 percent of the amount they originally took on.
149
143. Nigel Chiwaya, These Five Charts Show How Bad the Student Loan Debt Situation Is,
NBC
NEWS (Apr. 24, 2019, 6:00 AM), https://www.nbcnews.com/news/us-news/student-loan-
statistics-2019-n997836 [https://perma.cc/2UT7-89H7].
144. Students & Debt, D
EBT.ORG, https://www.debt.org/students [https://perma.cc/DY2M-
DHE3].
145. See A Look at the Shocking Student Loan Debt Statistics for 2020, S
TUDENT LOAN HERO
(Jan. 15, 2020), https://studentloanhero.com/student-loan-debt-statistics [https://perma.cc/SGV8-
CGNW]. Whereas a default occurs when a debtor is at least 270 days behind on payments, a
delinquency occurs if the debtor is behind on a payment by any amount of time. See Christina
Majaski, Delinquency vs. Default: What’s the Difference?, I
NVESTOPEDIA (Apr. 14, 2019), https:/
/www.investopedia.com/ask/answers/062315/what-are-differences-between-delinquency-and-
default.asp [https://perma.cc/THM7-6QXW].
146. Mark Catanzaro, A Snapshot of Record-High U.S. Household Debt, F
ED. RSRV. BANK
OF
ST. LOUIS (Apr. 22, 2020), https://www.stlouisfed.org/open-vault/2020/april/snapshot-record-
high-household-debt [https://perma.cc/CWT9-LANC].
147. See Beth Akers, The Typical Household with Student Loan Debt, B
ROOKINGS INST.
(June 19, 2014), https://www.brookings.edu/research/the-typical-household-with-student-loan-
debt [https://perma.cc/U5PF-HB79] (“[In 2010] the median household devoted four percent of
their monthly earnings to [student] loan repayment. Seventy-five percent of households devoted
less than seven percent of monthly earnings to student loan repayment.”).
148. Aissa Canchola & Seth Frotman, The Significant Impact of Student Debt on
Communities of Color, C
ONSUMER FIN. PROT. BUREAU (Sept. 15, 2016), https://
www.consumerfinance.gov/about-us/blog/significant-impact-student-debt-communities-color [https://
perma.cc/ZRM3-9D35] (“Federal government data shows that over 90 percent of African-
American and 72 percent of Latino students leave college with student loan debt, compared to 66
percent of white students and 51 percent of Asian-American students.”).
149. See Ben Miller, New Federal Data Show a Student Loan Crisis for African American
Borrowers, C
TR. FOR AM. PROGRESS (Oct. 16, 2017, 9:00 AM), https://www.americanprogress.org/
issues/education-postsecondary/news/2017/10/16/440711/new-federal-data-show-student-loan-crisis-
african-american-borrowers [https://perma.cc/P34K-XKAJ] (“12 years after entering college, the
median African American borrower owed . . . 113 percent of what they originally borrowed.”);
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Individuals from minority groups not only owe more but default
at higher rates. A study by the Federal Reserve Bank of San Francisco
found that, in neighborhoods with the lowest percentage of Black and
Latino residents, only 4.9 percent of borrowers were in default and only
10 percent had experienced a default since 2003.
150
By contrast, in the
neighborhoods with the highest percentage of Black and Latino
residents, the default rate more than tripled to 15.3 percent, with more
than 26 percent of the residents having experienced a default since
2003.
151
This is a gap that exists nationwide. Tellingly, the most
important factor in predicting whether residents of a zip code will
struggle with student debt is not household income, but race. All told,
these disparities have a significant effect on the racial wealth gap.
There is a sizable gender gap as well. Women make up 57 percent
of all college students
152
but owe nearly two-thirds of all student loan
debt.
153
The gender pay gap only exacerbates the problem, making it
harder for women to close the wealth gap with their male colleagues.
154
When considering the negative effects of student loan debt, there
is a tendency to focus on the individuals who are behind on their
payments. But the impact is far broader. Even those individuals who
are dutifully making payments are harmed by student loan debt. To
stay current on their debts, many people postpone marriage, delay
buying a home, put off saving for retirement, and push back having
children.
155
In short, student loan debt has inhibited asset accumulation
Jillian Berman, How Race Affects Student Debt, MARKETWATCH (Dec. 27, 2017, 7:59 PM), https:/
/www.marketwatch.com/story/how-race-affects-student-debt-2017-10-16 [https://perma.cc/K8TY-LBTQ]
(“Black borrowers who began school during the 2003-2004 academic year owed 113% of what
they originally borrowed 12 years later . . . . That’s compared to 65% for white borrowers and
83% for Hispanic or Latino borrowers.”).
150. See F
ED. RSRV. BANK OF S.F., AT WHAT COST? STUDENT LOAN DEBT IN THE BAY
AREA 29 (2019), https://www.frbsf.org/community-development/files/student-loan-debt-in-the-
bay-area.pdf [https://perma.cc/C2M2-DKNK].
151. Id.
152. Richard Fry, U.S. Women Near Milestone in the College-Educated Labor Force, P
EW
RSCH. CTR. (June 20, 2019), https://www.pewresearch.org/fact-tank/2019/06/20/u-s-women-near-
milestone-in-the-college-educated-labor-force [https://perma.cc/5PG5-4MW9].
153. Deeper in Debt: Women & Student Loans, A
M. ASS’N OF U. WOMEN (May 2019), https:/
/www.aauw.org/research/deeper-in-debt [https://perma.cc/T6GS-WH9U].
154. See id. (“From the moment women graduate from college, most face a gender pay gap—
which widens as they age. This makes it even harder to pay off their larger share of student debt.”).
155. See Tom Anderson, Debt-Locked: Student Loans Force Millennials To Delay Life
Milestones, NBC
NEWS (Aug. 5, 2015, 2:14 PM), https://www.nbcnews.com/better/money/debt-
locked-student-loans-force-millennials-delay-life-milestones-n404636 [https://perma.cc/3JW6-NDNR]
(“A survey by Bankrate.com released Wednesday found that 56 percent of people aged 18 to 29
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and has increased the generational wealth gap. Ironically, the federal
student loan program—which was supposed to help level the playing
field—has in many ways fueled economic, gender, and racial
inequality.
Although student loan debt is unlikely to cause an economic
catastrophe on the order of the Great Recession, it is a crisis
nonetheless. Fortunately, something can be done to alleviate the
problem. As this Article argues, bankruptcy offers a way to help
individuals who are most burdened by their student loan debts receive
discharges. The next Section presents solutions that may encourage
student loan debtors to take advantage of their legal rights and enable
them to obtain relief.
B. Solutions
To reduce the disadvantages that one-shotters face in the legal
system, scholars have offered a variety of solutions.
156
These proposals
fall into two groups: institutional reforms and litigant-focused reforms.
Whereas the former focus on changing the system at the congressional
or judicial levels, the latter focus on improving the ability of one-
shotters to litigate their cases.
Although they have not discussed the merits of educational
benefit litigation directly, many commentators have identified the need
for student loan bankruptcy reform more broadly. In this context,
proposals center on institutional changes. Ideas range from
congressional abolishment of the student loan discharge exemption to
increased judicial monitoring of student loan disputes.
157
In theory, these reforms would be effective, but, in practice, they
would be difficult to implement. Institutional reforms require
significant resources and political capital. And given that bankrupt
student loan debtors tend to lack both, Congress and the judiciary are
have put off major life events like getting married, purchasing a car or home, or saving for
retirement, because of student debt.”).
156. See, e.g., Galanter, supra note 85, at 135–44 (proposing four potential reforms); Donald
Songer, Ashlyn Kuersten & Erin Kaheny, Why the Haves Don’t Always Come Out Ahead: Repeat
Players Meet Amici Curiae for the Disadvantaged, 53 P
OL. RSCH. Q. 537, 553 (2000) (“[T]he
support of organized groups [through the filing of amicus briefs] appears to overcome the normal
disadvantages that afflict one-shot litigants with inferior resources of their own.”).
157. See Cloud & Fossey, supra note 13, at 497 (advocating for the repeal of the undue
hardship standard); Pardo, supra note 13, at 2177–78 (advocating for a system of managerial
judging). For a discussion of managerial judging, see generally Judith Resnik, Managerial Judges,
96 H
ARV. L. REV. 374 (1982).
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unlikely to enact changes that benefit these individuals—particularly
when doing so will harm powerful banking institutions.
158
Setting the implementation concern aside, another problem is that
these institutional reforms place the emphasis on the wrong issue.
Student loan debtors are not being denied their legal rights because the
statute was poorly drafted or because courts have been derelict in their
duties. Instead, the problem is that creditors have abused their status
as repeat players to develop precedent that is legally indefensible, then
used this precedent to cultivate the myth of nondischargeability.
In light of these problems with institutional reforms, it is worth
considering litigant-focused approaches, of which there are many.
Some examples include increasing the availability of legal services,
159
distributing educational materials to debtors,
160
encouraging one-
shotters to take beneficial legal actions,
161
and helping one-shotters
organize into groups that will enable them to better compete against
repeat players.
162
Because each of these options targets a slightly
different problem, determining which will prove most beneficial in the
student loan setting requires understanding why creditors have an
advantage there.
As the data in the preceding Part show, creditors’ success depends
on two factors: first, that few debtors bring lawsuits and second, that
those who do bring such claims are willing to settle. If either of these
factors change, then the repeat-player advantage that student loan
158. Although members of Congress routinely introduce bills that would make student loans
dischargeable in bankruptcy, these bills rarely gain more than nominal support. See, e.g., Josh
Mitchell & Katy Stech Ferek, Trump Administration Looking at Bankruptcy Options for Student
Debt, W
ALL ST. J. (Feb. 20, 2018, 5:37 PM), https://www.wsj.com/articles/trump-administration-
looking-at-bankruptcy-options-for-student-debt-1519146215 [https://perma.cc/Q6ME-UFA3]
(“Several bills in Congress that would make student loans dischargeable in bankruptcy . . . have
gained little traction.”); see also Top U.S. Student Loan Official Quits, Saying White House is
Hostile to Protecting Borrowers, L.A.
TIMES (Aug. 27, 2018, 4:15 PM), http://www.latimes.com/
business/la-fi-student-loans-20180827-story.html [https://perma.cc/W9YR-YKMY] (reporting
the resignation of the student loan ombudsman due to lack of government cooperation in various
student loans investigations).
159. See Galanter, supra note 85, at 140–41.
160. See Deborah L. Rhode, Access to Justice, 69 F
ORDHAM L. REV. 1785, 1804 (2001)
(“Innovative projects and reform proposals are not in short supply. Examples include . . .
increased educational materials . . . .”).
161. See D. James Greiner, Dalié Jiménez & Lois R. Lupica, Self-Help Reimagined, 92 I
ND.
L.J. 1119, 1136–38 (2017) (conducting an experiment and finding that informational mailers can
help poor debtors increase their win-rate against repeat-player creditors).
162. See Galanter, supra note 85, at 141–43 (“The reform envisaged here is the organization
of ‘have-not’ parties . . . into coherent groups that have the ability to act in a coordinated
fashion . . . .”).
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creditors enjoy will dissipate. After all, if debtors start bringing lawsuits
in large numbers, creditors will be forced to offer many settlements,
thereby increasing the cost of maintaining the myth of
nondischargeability. And if debtors refuse to settle, their cases will
yield precedent in support of discharge, thereby encouraging
additional debtors to seek discharges.
163
Given creditors’ litigation strategy, there appears to be a number
of ways to address the problem. For example, legal aid organizations
could ensure their bankruptcy clients are informed regarding the
dischargeable nature of certain student loan debts. Alternatively, legal
trade associations, such as the National Association of Consumer
Bankruptcy Attorneys, could work to rectify the widespread
misperception among consumer bankruptcy attorneys that student
loans are never dischargeable.
164
Solutions of this sort, however, require coordinated, sustained
efforts to be effective and, in light of the already strained legal aid
system, necessarily compete with other important matters involving
access to justice. There are, fortunately, options that do not suffer from
these defects. At step one of the discharge analysis, bankruptcy class
actions could help level the playing field.
165
And at step two, increased
attorney awareness of student loan bankruptcy data could mitigate the
current problems in undue hardship litigation.
1. Educational Benefit: Class Action Litigation. Although
bankruptcy courts vary in their treatment of debtor class actions, the
past two decades have seen a more permissive standard take hold.
Whereas the earliest cases precluded debtor class actions entirely,
166
more recent cases permit their certification at a district-wide—and
sometimes nationwide—level.
167
Today, debtor class actions are a
163. See Cross, Irrational Plaintiffs, supra note 122, at 15–23 (discussing “the corrective
capacity of the irrational litig[ation]” in which society benefits when one-shotters litigate cases
that would be economically rational to settle).
164. For a discussion of the widespread nature of this belief among consumer bankruptcy
attorneys, see supra note 68.
165. See Kara Bruce, The Debtor Class, 88 T
UL. L. REV. 21, 24 (2013) (“[C]lass actions may
enhance regulation of consumer bankruptcy cases without placing additional resource strains on
the bankruptcy system and without the need for protracted reform efforts.”).
166. See, e.g., Sunstar Acceptance Corp. v. Knox (In re Knox), 237 B.R. 687, 693 (Bankr. N.D.
Ill. 1999) (“No core jurisdiction lies in this bankruptcy case over [other class members’] claims.”).
167. See Bruce, supra note 165, at 69 (“The nationwide-jurisdiction approach has gained
prominence in class action cases decided since the global financial crisis of the mid-2000s.”); see
also Neilson v. Death Row Recs., Inc. (In re Death Row Recs., Inc.), No. 06-11205, 2012 WL
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538 DUKE LAW JOURNAL [Vol. 70:497
viable, if infrequently used, means of aggregating bankruptcy claims
and minimizing some of the advantages enjoyed by repeat players.
168
Despite the trend in bankruptcy, class certification is still not
simple to achieve. The primary difficulty lies in the fact that debtor
classes must meet the same standards in the Federal Rules of Civil
Procedure that apply to all plaintiffs’ classes.
169
This includes Rule
23(a)’s requirements of numerosity, commonality, typicality, and
adequacy of representation, as well as Rule 23(b)’s requirement that
questions common to the class predominate.
170
Although a discussion
of these criteria is beyond the scope of this Article, the educational
benefit litigation is likely the sort of dispute that would qualify for class
action certification.
First, there are tens of thousands of similarly situated debtors.
Second, the claims, as seen in the case law, present common legal and
factual issues. And third, two cases seeking class certification are now
pending in the Fifth and Tenth Circuits.
171
With the right lead plaintiff
and counsel, class certification is possible. A class action lawsuit is not
an easy solution, but it is perhaps the most pragmatic one. If successful,
such a case would not only provide many debtors with the relief they
are entitled to under the Bankruptcy Code but would also definitively
952292, at *1 (B.A.P. 9th Cir. Mar. 21, 2012) (remanding the case “to the bankruptcy court to
issue a certification order . . . under Civil Rules 23(a) and 23(b)(2)”); HomeSide Lending Inc. v.
Sheffield (In re Sheffield), 281 B.R. 24, 32–33 (Bankr. S.D. Ala. 2000) (certifying a nationwide
debtor class). A number of scholars have defended nationwide class actions on pragmatic and
legal grounds. See generally, e.g., Elizabeth Warren & Jay L. Westbrook, Class Actions for Post-
Petition Wrongs: National Relief Against National Creditors, 22
AM. BANKR. INST. J. 14 (2003)
(“Beyond doubt, the district court has jurisdiction of the claims and beyond doubt could certify a
nationwide Rule 23 class, if the other elements of Rule 23 are satisfied.”). For a critique of
nationwide class certification, see generally Corinne Ball & Michele J. Meises, Current Trends in
Consumer Class Actions in the Bankruptcy Arena, 56 B
US. LAW. 1245 (2001).
168. See Kara J. Bruce, Vindicating Bankruptcy Rights, 75 M
D. L. REV. 443, 450 (2016)
(“[T]he debtor class action remains a relatively obscure phenomenon.”).
169. Another potential obstacle is that creditors may file a motion to compel arbitration.
However, this occurred in a pending student loan bankruptcy class action, and in that case, the
bankruptcy court denied the motion. See generally Order, Haas v. Navient Sols., LLC (In re
Haas), No. 15-35886 (DRJ) (S.D. Tex. Jan. 10, 2017) (denying Navient’s motion to compel
arbitration).
170. See F
ED. R. CIV. P. 23(a)–(b). In recent years, federal courts have heightened some of
the requirements for class certification. See generally Robert H. Klonoff, The Decline of Class
Actions, 90
WASH. U. L. REV. 729 (2013) (analyzing “the key areas in which federal courts have
made class actions more difficult for plaintiffs to bring”).
171. See Navient Sols., LLC v. McDaniel (In re McDaniel), 590 B.R. 537 (Bankr. D. Colo.
2018), aff’d, No. 17-1445, 2020 WL 5104560 (10th Cir. Aug. 31, 2020); Navient Sols., LLC v.
Crocker (In re Crocker), 585 B.R. 830 (Bankr. S.D. Tex. 2018), aff’d in part, rev’d in part, 941 F.3d
206 (5th Cir. 2019).
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2020] THE STUDENT LOAN BANKRUPTCY GAP 539
show that many types of student loan debt are dischargeable even
absent a showing of undue hardship.
Notably, class actions are primarily a solution for step one claims
involving the scope of the student loan discharge exception. Given the
fact-specific nature of step two undue hardship claims, class
certification is very improbable in that context. Accordingly, an
alternative approach is necessary for those cases.
2. Undue Hardship: Increasing Attorney Awareness. For undue
hardship cases, the solution lies in reducing the incentives for strategic
settlement at the individual level—namely, informing attorneys of the
legal realities surrounding student loan adversary proceedings. Nearly
all bankruptcy attorneys accept the myth of nondischargeability. By
not doing the legal research required to challenge the veracity of the
myth, bankruptcy attorneys have failed to serve their clients’ best
interests. And this failure has led to a pricing model that is untenable.
Owing to their belief in the myth of nondischargeability, attorneys
view adversary proceeding litigation as consuming an exorbitant
amount of time. Accordingly, they price student loan bankruptcy
services as high as $40,000.
172
Compare this price to the cost of a
Chapter 7 bankruptcy, which averages about $1,500.
173
In other words,
an individual can pay $1,500 to get all of their non-student loan debts
discharged or pay upward of $40,000 to roll the dice on getting their
student loans discharged. Viewed from that perspective, a student loan
adversary proceeding sounds like a bad deal. Not to mention that, for
an individual who is bankrupt, coming up with tens of thousands of
dollars for legal fees is all but impossible.
This situation has led to a bit of a vicious circle. Because of the
myth of nondischargeability, attorneys charge high rates for adversary
proceedings. The high rates discourage debtors from filing adversary
proceedings. And finally, the low number of adversary proceedings
allows creditors to engage in strategic settlement and, thereby,
reinforce the myth of nondischargeability.
172. Aarthi Swaminathan, ‘I Have a Chance Now To Have a Life’: Navy Vet Who Won
Watershed Student Loan Ruling Tells His Story, Y
AHOO! FIN. (Jan. 12, 2020), https://
finance.yahoo.com/news/student-loans-discharged-in-bankruptcy-kevin-rosenberg-190151284.html
[https://perma.cc/8ETF-YGTW] (quoting a student loan debtor as reporting attorney fee estimates
of “around $40,000 because the lawyers see it as this really hard, arduous process”).
173. Chapter 7 Bankruptcy: What Will It Cost and Will It Wipe Out My Debts?, N
OLO, https:/
/www.nolo.com/legal-encyclopedia/chapter-7-bankruptcy-survey-article.html [https://perma.cc/
DMN9-GCED].
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540 DUKE LAW JOURNAL [Vol. 70:497
Breaking this cycle requires convincing attorneys that student
loans can be discharged in bankruptcy and that doing so does not
require an extraordinary time investment. There are three interrelated
ways to address this problem. First, the media must report stories of
successful student loan discharges. Second, judges must call out the
myth of nondischargeability in their judicial opinions. And third,
attorneys must adopt a workable pricing model. These points are worth
exploring further, so let me take each in turn.
Regarding the media, there is reason to be optimistic. The last few
months have seen a notable shift in the way in which journalists portray
student loan bankruptcy proceedings. Instead of focusing solely on
student loan debtors who were unable to obtain a discharge, journalists
have begun to depict debtors who successfully navigated the discharge
process.
174
As more media reports emphasize favorable outcomes, the
myth of nondischargeability grows weaker. And, at a certain point,
bankruptcy attorneys will realize that what they have always believed
about student loan debt may not be true.
Although the media plays an important role, judges are
indispensable in dispelling the myth. Without court cases granting
discharges and explaining the true contours of the undue hardship
standard, there will be little positive news for the media to report.
Again, though, there is reason to be optimistic. In a recent bankruptcy
case in the Southern District of New York, Rosenberg v. New York
State Higher Education Services Corp. (In re Rosenberg),
175
the judge
174. See, e.g., Aisha Al-Muslim, Upending Bankruptcy ‘Myths,’ Judge Erases $220,000
Student Loan Debt, W
ALL ST. J. (Jan. 8, 2020, 9:00 AM), https://www.wsj.com/articles/upending-
bankruptcy-myths-judge-erases-220-000-student-loan-debt-11578523767 [https://perma.cc/WB3C-5MQJ]
(discussing a recent student loan discharge); Chris Arnold, Myth Busted: Turns Out Bankruptcy
Can Wipe Out Student Loan Debt After All, NPR (Jan. 22, 2020, 7:13 AM), https://www.npr.org/
2020/01/22/797330613/myth-busted-turns-out-bankruptcy-can-wipe-out-student-loan-debt-after-
all [https://perma.cc/TVF2-XMQV] (same); Leigh Jones & Vanessa Blum, ‘It Was a Constant,
Daily Stressor’: This Law Grad Got $221K in Student Loans Wiped Out. Who’s Next?, L
EGAL
SPEAK (Jan. 24, 2020), https://legalspeak.libsyn.com/it-was-a-constant-daily-stressor-this-law-
grad-got-221k-in-student-loans-wiped-out-whos-next [https://perma.cc/576W-FAMR] (same);
Karen Sloan, Law Grad’s $221K Loan Discharge Has Bankruptcy Bar Buzzing, L
AW.COM (Jan.
9, 2020, 5:15 PM), https://www.law.com/2020/01/09/law-grads-221k-loan-discharge-has-
bankruptcy-bar-buzzing [https://perma.cc/H2XG-W9QX] (same); Swaminathan, supra note 172
(same).
175. Rosenberg v. N.Y. State Higher Educ. Servs. Corp. (In re Rosenberg), 610 B.R. 454
(Bankr. S.D.N.Y. 2020).
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2020] THE STUDENT LOAN BANKRUPTCY GAP 541
came down firmly on the side of the debtor and discharged more than
$220,000 in student loan debt.
176
This case is striking for its outcome. As the data showed, the
process of strategic settlement has ensured that almost all judicial
rulings on the merits cut against the debtor. Accordingly, a judicial
opinion that grants a discharge stands out for that reason alone.
Even more notable than the outcome, though, is the rhetoric used
in the opinion. Attacking the myth of nondischargeability, the judge
declared that the belief that student loans cannot be eliminated in
bankruptcy has “become a quasi-standard of mythic proportions so
much so that most people (bankruptcy professionals as well as lay
individuals) believe it impossible to discharge student loans.”
177
This
opinion is the first to call out the myth so forcefully and directly. Given
the strength of this decision’s language, it has attracted the attention of
other judges and the broader consumer bankruptcy community.
178
Of
particular note, in a ruling handed down mere weeks later, another
bankruptcy judge cited Rosenberg favorably and granted a partial
discharge to the debtor.
179
Although it is too early to say for sure, Rosenberg may mark a
turning point. Instead of growing ever wider, the Student Loan
Bankruptcy Gap may, at last, begin to narrow. Truly closing the gap,
however, will require complete buy-in from bankruptcy attorneys. And
that goal leads to the third and final solution: a workable pricing model.
As discussed, most bankruptcy attorneys charge tens of thousands
of dollars to handle student loan adversary proceedings. Given that
anyone who is likely to prove undue hardship is bankrupt, very few
debtors can afford this fee. To find a better pricing model, I spoke with
several successful bankruptcy attorneys who have made student loan
debt a key part of their practice.
180
These attorneys had two
176. Id. at 462 (holding that the debtor “satisfied the Brunner test” and is entitled to a
complete discharge).
177. Id. at 459.
178. See, e.g., Debra Cassens Weiss, Law Grad Wins Discharge of His Student Debt in
Opinion Criticizing ‘Punitive Standards,’ A.B.A.
J. (Jan. 9, 2020, 10:25 AM), https://
www.abajournal.com/news/article/law-grad-wins-discharge-of-his-student-debt-in-opinion-criticizing-
punitive-standards [https://perma.cc/4K54-DYZ3] (discussing Rosenberg, 610 B.R. at 454).
179. See U.S. Dep’t of Educ. v. Clavell (In re Clavell), 611 B.R. 504, 529 (Bankr. S.D.N.Y.
2020) (citing, with approval, Rosenberg, 610 B.R. at 461).
180. A number of successful bankruptcy attorneys make student loans a significant part of
their practice by handling them on a contingency fee. See, e.g., Florida Consumer Attorneys:
Bankruptcy, Debt Relief, Student Loans and Estate Planning, C
HRISTIE D. ARKOVICH, P.A.,
https://www.christiearkovich.com [https://perma.cc/5W7T-CETJ] (noting that the firm has
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542 DUKE LAW JOURNAL [Vol. 70:497
recommendations: automate the administrative work and offer a
payment plan.
To the first point, while student loan adversary proceedings may
seem daunting, the actual process is straightforward and formulaic.
There is a significant upfront investment in learning the case law and
developing pleadings, but that is a one-time cost. By creating high-
quality pleadings and teaching a paralegal how to collect the
information necessary to tailor the filings to individual debtors,
attorneys can free up substantial time that can be used for legal review
and analysis. This strategy reduces the overall cost of the adversary
proceeding, allowing for lower fees.
And that leads to the second distinguishing feature of these
attorneys: the use of payment plans. By allowing clients to pay over
time, these attorneys are able to service a much broader set of
debtors—namely, all those individuals who are unable to come up with
thousands of dollars before litigation has even started. This payment
plan offering also has the important benefit of aligning incentives.
After all, if the attorney is able to discharge a significant portion of a
client’s student loans, that client will be far more likely to pay his legal
fees.
The Student Loan Bankruptcy Gap is a massive problem, and
there is no way to solve it overnight. But there is a path forward. It
involves dispelling the myth of nondischargeability and showing
attorneys how to handle—and win—student loan cases.
C
ONCLUSION
“Student loan debt cannot be discharged in bankruptcy.”
Journalists report this claim as an undeniable truth. Financial advisers
recite it as an immutable fact. And attorneys state it as a definitive
conclusion of law. Everyone is in agreement. If you have student loan
debt, bankruptcy is not an option. There is just one problem—this
accepted “wisdom” is a myth.
income-contingent payment plans); Student Loans, HOVERSON L. OFFS., P.A., https://
hoversonlaw.com/student-loans [https://perma.cc/9QR6-NGQ8]; The Firm, S
MITH L. GRP.,
https://www.acsmithlawgroup.com/aboutslg [https://perma.cc/WH4R-8QLL]. Unfortunately,
attorneys like these represent a very small percentage of the consumer bankruptcy bar. See Jillian
Berman, These Lawyers May Have Discovered a Way To Wipe Away Student Debt in Bankruptcy,
M
ARKETWATCH (Mar. 3, 2017, 3:44 PM), https://www.marketwatch.com/story/these-lawyers-
may-have-discovered-a-way-to-wipe-away-student-debt-in-bankruptcy-2017-02-13 [https://perma.cc/
6CCU-YEJ9] (describing student loan bankruptcy as a “niche practice area”).
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This Article confronts the myth of nondischargeability, illustrating
how it has harmed millions of Americans by convincing them not to
pursue student loan adversary proceedings. Drawing upon original
data, this Article shows that the Student Loan Bankruptcy Gap is not
a necessary feature of the current bankruptcy laws. Instead, it is a
predictable consequence of litigation between repeat-player creditors
and one-shotter debtors.
As repeat players, student loan creditors are more concerned with
establishing favorable precedent than they are with winning individual
cases. Given these incentives, creditors have worked to stack the set of
cases that go to trial in their favor. This strategy has been highly
successful, enabling creditors to develop extensive precedent in
support of their side. Unfortunately, because debtors lack the funds to
mount aggressive legal defenses and are unconcerned with the
establishment of sound precedent, they are not in a natural position to
challenge student loan creditors. To address the problem, this Article
proposes two solutions—one focused on each step of the student loan
bankruptcy discharge analysis.
For step one educational benefit claims, debtors should pursue
bankruptcy class actions. Given the trend toward permitting
bankruptcy class actions and the common legal and factual issues
present in educational benefit cases, there is reason to believe that class
actions will be certified, at least at the district-wide level. If one is
successful, it will both grant relief to individuals within the class and
help dispel the myth of nondischargeability.
For step two undue hardship claims, three complementary
approaches can help close the Student Loan Bankruptcy Gap.
Journalists should shift their focus to student loan success stories that
are more representative of actual case outcomes. Judges must directly
challenge the myth of nondischargeability in their rulings. And
attorneys need to adopt a fee structure that debtors can afford. Taken
together, these reforms will go a long way toward closing the Student
Loan Bankruptcy Gap.
