James Murphy, 65, can’t pay his student loans. He owes more than $200,000 in federal loans that he took out to pay for college for his three children. After a dozen years of unemployment, Murphy is asking a bankruptcy court to free him from the six-figure obligation to the Department of Education (ED).
If only it were that simple. Murphy’s fight, which is already three years old, puts him at odds with a Congressionally-created private company called ECMC that works to collect student loan debts on behalf of the ED. ECMC says that Murphy’s circumstances, while dire, do not qualify him for the “undue hardship” exception to federal law prohibiting bankruptcy courts from voiding student debt.
On Tuesday, lawyers from the ED itself endorsed that viewpoint in a filing asking the judge in Murphy’s case to uphold the standards ECMC’s attorneys seek.
Murphy started taking out the parental student loans in 2001. In 2002, the manufacturing company he headed shut down and moved abroad, dropping his annual income from $165,000 to zero. He says he’s been unable to find a job since. He continued taking out the loans on his kids’ behalf through 2007. He’s unable to make payments on them, or on his home, which he says is being foreclosed.
Murphy estimates that even if he found work at $50,000 per year, kept working until he was 77, and made loan payments accordingly, the amount he owes the ED wouldn’t shrink; it would double.
Murphy’s fate hinges on a court battle over two little words: “undue hardship.” Thanks to successive changes to the Higher Education Act since the 1970s, student loans cannot be discharged in bankruptcy like credit card or even gambling debts can be. The only exception is in cases where the borrower can show that being forced to repay the loan after bankruptcy would bring “undue hardship” upon them — only lawmakers didn’t define the phrase, so it’s been left to courts and lawyers to cobble together a definition in case law.
ECMC’s lawyers argue that Murphy isn’t facing “undue hardship,” but instead is a freeloading scamp. Finding that he faces undue hardship in repaying his debts “would suggest that any debtor nearing retirement can borrow as much money in federal student loans as possible, only to turn around a few years later, upon retirement, and have that obligation discharged due to the debtor’s ‘unemployment,’” the company argued in a previous filing in the case.
ECMC has worked on behalf of the government to promote the strictest possible courtroom definition of “undue hardship” in cases like Murphy’s for years, but this time the government’s own attorneys are also getting directly involved. Tuesday’s filing direct from the ED backs ECMC’s logic – naturally, since ECMC is pursuing Murphy’s debts on behalf of the department – and fleshes out the background thinking behind it.
Somebody like Murphy who borrows on behalf of his children late in life “does so with full knowledge that repayment may require that he remain employed at or past normal retirement age, that his income may top out or decrease at later stages of his or her career, and that further employment opportunities may be limited.” Even though Murphy and his wife have been living on her meager salary since he was laid off in 2002 because he hasn’t gotten hired anywhere else, enforcing his loan debts would not bring “undue hardship” on the Murphys according to the feds.
The ED’s lawyers laid out the case for maintaining such stringent terms around the exchange between education borrowers and taxpayers. Because student loans don’t require collateral or a credit check like other debts, they write, “[t]he government’s only financial protection lies in the debtor’s commitment to honor the obligation to repay the loan.”
Look, though, at the nitty-gritty of how the government and its agents at ECMC have sought to define “undue hardship” in individual cases. Karen Schaffer went to McDonald’s regularly while caring for a sick husband and working full-time. That makes her guilty of luxury spending, according to ECMC, and proves her hardship is deserved rather than undue. Unemployed, disabled, and impoverished Monica Stitt dared to pay down some credit card debt when she briefly found work in 2008. That decision means she didn’t make a good-faith effort to repay her student loans, so no discharge for her either.
Perhaps such arguments from government lenders would make sense were there a track record of student borrowers trying to cheat on the deal they made by borrowing for school. That exact question has been studied repeatedly since the 1970s, as the Consumer Financial Protection Bureau (CFPB) noted in a 2012 report on both federal and private student lending.
A 1976 government study “did not report a large number of student loan bankruptcies.” Congress created the “undue hardship” rule that same year, but only applied it for people less than five years into their repayment cycle. Congress extended that time window to seven years in 1990, before eliminating it entirely and requiring “undue hardship” findings for all bankrupt borrowers in 1998. A 1997 review that “did not find any systematic abuse of the bankruptcy system for student loan discharge” didn’t prevent lawmakers from tightening the rules, according to the CFPB.
That suggests the tight definition of “undue hardship” that the Obama administration is seeking to uphold in Murphy’s case is a solution in search of a problem. Meanwhile, people finding it impossible to repay their student loans is a large and growing problem. Default rates are many times higher than their historic average, total loan volume outstanding tops a trillion dollars, and the ongoing weakness in the job market makes it likely that the disconnect between what people can earn from their education and what they owe for it will continue.