Eighth Circuit Applies Novel Test In Recent Student Loan Discharge Case

In a recent decision considering the dischargeability of student loan debt, the Eighth Circuit Court of Appeals affirmed a lower court's decision establishing a unique and flexible test for determining whether repaying student loans imposes an "undue hardship" on a debtor.

Under the Bankruptcy Code, graduates generally cannot discharge student loan debt absent certain conditions. Section 528(a)(8) of the Bankruptcy Code provides that a bankruptcy discharge does not apply to student loans unless excepting student loans from discharge "would impose an undue hardship on the debtor and the debtor's dependents[.]" 11 U.S.C. § 528(a)(8). In the absence of an "undue hardship" definition in the Bankruptcy Code, most courts rely on Brunner v. New York State Higher Education Services to determine whether a student loan imposes an undue hardship, and is therefore dischargeable in bankruptcy. 831 F.2d 395 (2d Cir. 1987). Under the Brunner test, a student loan debtor must demonstrate:

She cannot maintain a minimal standard of living for herself and her dependents if required to repay the loans; That additional circumstances exist indicating that her financial condition is "likely to persist for a significant portion of the [loan] repayment period."; and That she has made a good faith effort to repay the loan. See id. at 396. Most courts, applying the Brunner test, find that a college degree militates against a finding of undue hardship because the mere existence of the college degree indicates that a graduate's financial condition can improve.

The Eighth Circuit took a different approach in Conway v. National Collegiate Trust. In Conway, the debtor graduated with a B.A. in Media Communications and fifteen student loans with an aggregate balance of over $118,000. Following a series of lay-offs from her post-graduation jobs, Ms. Conway filed for chapter 7 bankruptcy and sought to discharge her student loans. Ms. Conway's private student loan provider, National Collegiate Trust, contested the discharge and the Missouri bankruptcy court refused discharge, citing Conway's college degree and "at least 30 years left to navigate the job market" as support for her ability to repay the loans. Conway v. Nat'l Collegiate Trust (In re Conway), 489 B.R. 828 (Bankr. E.D. Mo. 2013).

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