Student loans

Approximately 2,200 students who enrolled in any one of five schools operated by Corinthian Colleges, Inc., a New Jersey for-profit entity, are eligible to have their federal student loans canceled. Corinthian Colleges ceased operations in 2015 under scrutiny by government entities into fraudulent conduct including misrepresentations made between 2010 and 2014 about post-graduate employment rates, the transferability of credits, and other issues. The schools affected by the loan cancellation are Everest Institute, Everest College, Everest University, Heald College, and Wyotech. Students who have their federal loans canceled will make no further payments and will receive a refund of payments already made. The loan cancellation was announced on May 22, 2017, in a Press Release issued by Attorney General Christopher S. Porrino’s Office. The Attorney General’s office is sending outreach letters and application forms to those students who may be eligible for the loan cancellation.

The standard for appellate review of a bankruptcy court’s decision that repayment of her student loans would constitute an “undue hardship,” in part due to a “certainty of hopelessness” as to future ability to pay, is “clear error” for the factual findings and “de novo” for application of law, and the debtor’s past financial decisions have no bearing on this forward-looking prong of the Brunner test. ECMC v. Acosta-Conniff, No. 16-12884 (11th Cir. April 19, 2017) (unpublished).

The Bankruptcy Court found that repayment of Alexandra Acosta-Conniff’s $112,000 student loan debt would constitute “undue hardship” under section 523(a)(8) and granted Ms. Acosta-Conniff discharge of those loans. On appeal, the district court reversed.

The Eleventh Circuit began by reaffirming its reliance on the test set forth in Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987) (the “Brunner test”). Under this three-pronged test, the court looks at the debtor’s present ability to pay, the likelihood that she will be able to repay the loan in the future, and whether she has made good faith efforts in the past to repay the loan. The point of disagreement between the bankruptcy court and the district court was whether Ms. Acosta-Conniff had proved the second prong of the test by demonstrating a “certainty of hopelessness” with respect to her future ability to repay the loan.

On appeal the Eleventh Circuit noted that the bankruptcy court’s evidentiary findings with respect to the separate prongs of the Brunner test are findings of fact which should be reviewed on appeal under a “clear error” standard rather than the de novo review that would apply to conclusions of law. Here, the district court failed to distinguish the standard of review it applied to the bankruptcy court’s factual finding that Ms. Acosta-Conniff met the certainty of hopelessness test. Therefore, the Eleventh Circuit reversed and remanded to the district court to clarify the standard of review it applied to the question.

Having concluded the appeal on this basis, the circuit court went on to discuss a troubling aspect of the district court’s opinion. Specifically, the court focused on the district court’s comments that Ms. Acosta-Conniff was to blame for incurring so much debt in pursuit of four graduate and post-graduate degrees in special education, notwithstanding the likelihood that her salary would never justify the expense. This, the circuit court found, was an error of law. The second prong of the Brunner test is a forward-looking test that does not assign blame for the decisions that may have led to the debtor’s financial distress. What the court gave with one hand, however, it took away with the other in a footnote suggesting that evidence of a debtor’s improvident borrowing could be a factor in the third prong of the Brunner test.

In continuing to apply the Brunner test despite changes in the Code and the reality of higher education costs and lending practices, the Eleventh Circuit perpetuated many of the current problems in the student loan miasma. Furthermore, maintaining the “certainty of hopelessness” standard for future inability to repay, and leaving room for moral judgment to factor into application of the good faith aspect of the test bodes ill for debtors buried under student loan debt.

NACBA and NCLC filed an amicus brief in this case arguing that the Brunner test is outdated and should be replaced.

Acosta-Conniff 11th Cir. opinion April 2017

A loan is not an “educational benefit” within the meaning of section 523(a)(8)(A)(ii), therefore, that student loan discharge exception in did not apply. Kashikar v. Turnstile Capital Management, No. 16-1298 (B.A.P. 9th Cir. April 28, 2017).

Ms. Kashikar attended St. Matthew University School (SMU) in the Grand Cayman Islands. She obtained loans which were paid directly by the creditor to SMU and which, by the time she filed chapter 7 bankruptcy, amounted to over $73,000. She received her chapter 7 discharge and filed an adversary complaint seeking determination that her loans related to her attendance at SMU were discharged. The parties stipulated that “SMU has never been, and is not now, an ‘eligible educational institution’ as that term is defined under section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088), and has never been, and is not now, eligible to participate in a program under title IV of the Higher Education Act.” The court declined to address Ms. Kashikar’s argument under section 523(a)(8)(A)(i) because she had not raised that provision in her complaint. The court, however, applied an “expansive” reading of the phrase “educational benefit,” in section 523(a)(8)(A)(ii), and found the loans nondischargeable.

On appeal, the BAP reiterated its finding in Institute of Imaginal Studies v. Christoff (In re Christoff), 527 B.R. 624, 632 (B.A.P. 9th Cir. 2015) that, in the absence of “undue hardship,” section 523(a)(8) excepts from discharge: (1) loans made, insured, or guaranteed by a governmental unit; (2) loans made under any program partially or fully funded by a governmental unit or nonprofit institution; (3) claims for funds received as an educational benefit, scholarship, or stipend; and (4) and ‘qualified educational loan’ as that term is defined in the Internal Revenue Code.”

The Panel began its analysis with a discussion of the bankruptcy court’s decision that the debt was nondischargeable under the exception provided in section 523(a)(8)(A)(ii). It quickly dispensed with Ms. Kashikar’s argument that because the loan was paid directly to SMU rather than to her, the loan did not meet the “funds received” requirement of that section, finding that the reasoning in Christoff precluded that argument. Where actual funds were transferred to SMU on Ms. Kashikar’s behalf, the “funds received” requirement was met.

The court went on to find, however, that the bankruptcy court erred in deciding that the loan was an “educational benefit” within the meaning of section 523(a)(8)(A)(ii). Distinguishing an “educational benefit” in subparagraph (A)(ii) from an “educational overpayment or loan” or a “qualified educational loan” in subparagraph (A)(i), the court, quoting Christoff, said: “§ 523(a)(8)(A)(ii), now standing alone, excepts from discharge only those debts that arise from ‘an obligation to repay funds received as an educational benefit,’ and must therefore be read as a separate exception to discharge as compared to that provided in § 523(a)(8)(A)(i) for a debt for an ‘educational overpayment or loan’ made by a governmental unit or nonprofit institution or, in § 523(a)(8)(B), for a ‘qualified education loan.’” The court concluded that “a ‘loan’ is not an ‘educational benefit’ within § 523(a)(8)(A)(ii).”

Having found that Ms. Kashikar’s loan was not covered by the exception to discharge found in section 523(a)(8)(A)(ii), the panel went on to note that the provisions of section 523(a)(8) are presented in the disjunctive and therefore the bankruptcy court erred in declining to address whether the nondischargeability provision in 523(a)(8)(A)(i) applied. It remanded the case for determination of the evidentiary and substantive issues raised by consideration of subparagraph (A)(i).

Kashikar BAP 9th Opinion April 2017

Illinois Attorney General, Lisa Madigan, is leading the charge in investigating and enforcing consumer protection violations in the area of student lending. According to a press release issued by the Attorney General’s office, Ms. Madigan is calling for the U.S. Department of Education to forgive student loans for students who attended Everest College or the criminal justice program at Westwood College. Ms. Madigan’s investigations into both colleges revealed that students were fraudulently lured into enrolling in programs that were poorly or non-accredited and that students took out millions of dollars in federal student loans to attend the programs. In 2015, Ms. Madigan reached a $15 million settlement with Westwood College, which included forgiving private loans of students enrolled in the school. Ms. Madigan’s efforts are in addition to a current investigation by the AG’s office into Navient, the largest servicer of student loans in the country. She has also taken action against debt relief scammers who victimize student loan debtors into paying for help that never materializes.

Where there is little likelihood that the debtor will be able to pay her students loans now or in the future, the fact that an income-based repayment plan may be available does not automatically constitute an “ability to pay.” Fern v. FedLoan Servicing, No.16-6021 (B.A.P. 8th Cir. Feb. 7, 2017).

Sara Fern is a 35 year-old single mother of three who receives food stamps and rental assistance and has a monthly employment income of $1,507. While she receives occasional financial help from her mother, that assistance is expected to end when her mother retires. Her expenses exceed her income by $62/month. Ms. Fern has student loans totaling over $27,000 which have been in forbearance or deferment ever since she left school.

The U.S. Department of Education appealed the bankruptcy court’s finding that Ms. Fern’s student loans were dischargeable based on undue hardship under section 523(a)(8).

The Eighth Circuit has explicitly rejected the oft-used Brunner test for undue hardship in student loan cases. Instead that circuit applies a flexible totality-of-the-circumstances test under which it looks to “(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.” Under the third factor a court may address a number of considerations such as, whether the debtor has made a good faith effort to repay the loans, the extent to which her financial situation is within her control, and whether she has negotiated deferments or forbearances with respect to the loans.

Addressing these factors in turn, the bankruptcy panel found that: 1) Ms. Fern’s income has been steady and is unlikely to change, and 2) the bankruptcy court correctly found that Ms. Fern’s expenses are modest and reasonable. With respect to the broad considerations in the third factor, the court rejected the USDE’s contention that because Ms. Fern could avail herself of a income-based repayment plan which would not require any monthly payments, she can “afford” the debt. In so holding, the panel distinguished Educ. Credit Mgmt. Corp. v. Jesperson, 571 F.3d 775 (8th Cir. 2009), in which the court found that the debtor should have negotiated an income-contingent repayment plan with the student loan creditor. There, the court was persuaded by the facts that the debtor had a law degree, no dependents, had self-imposed restrictions on his income and had not attempted any loan repayments despite an ability to devote some income to those debts. Rather, the panel in Fern agreed with the bankruptcy court’s finding that factors such as the emotional burden of the debt, the negative credit effect of the loans and the potential tax obligation when a repayment plan would expire, all militated against requiring Ms. Fern to enter into an income-based repayment plan. The panel affirmed the bankruptcy court’s finding that the loans presented undue hardship and were subject to discharge.

Fern BAP8th opinion Feb 2017