Student Loan Repayment: When Does Accrued Interest Create an Undue Hardship?

By: Lindsey A. Haynes

St John’s University School of Law

American Bankruptcy Institute Law Review Staff Member

            In general, a borrower may not be relieved of its obligation to repay an educational loan. However, under title 11 of the United States Code (the “Bankruptcy Code”), a borrower may be relieved of such an obligation if it can show that the repayment would cause undue hardship. In Educational Credit Management Corp. v. Metz, a district court in Kansas held that Metz’s student loans were dischargeable under 11 U.S.C. § 523(a)(8) because the repayment of the accrued interest would cause undue hardship.[1] Vicki Metz attended community college from 1989 to 1991, borrowing over $16,000 and earning 50 college credits but no degree. Metz was unable to repay her educational loan despite often receiving merit raises throughout her career and living a modest lifestyle. Instead, notwithstanding paying nearly $15,000, the balance of Metz’s loan escalated to $67,277.88 in 2018.

            An educational loan remains the debtor’s obligation until it is paid in full or it is discharged.[2] Because the government wants to ensure young borrowers with “promising future income streams remain liable to preserve student loan funding in the future,” student loans are traditionally “presumptively nondischargeable.”[3] But those who try to repay their debts often feel an overwhelming burden because of the compounding interest.[4] Therefore, a very limited exception exists where a debtor may discharge an educational loan only if it would cause an undue hardship, which often requires extraordinary circumstances.

            The United States Court of Appeals for the Tenth Circuit, which includes Kansas, has adopted a three-part test established by the Second Circuit in Brunner v. New York State of Higher Education Services to determine if undue hardship exists.[5] First, it must be determined “that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living . . . if forced to repay the loans.”[6] Second, “additional circumstances” must exist, “indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans.”[7] Such circumstances may include that the “debtor will not be able to pay his loans for a significant portion of the repayment period.”[8] Third, the debtor must have made “good faith efforts to repay the loans.”[9] The debtor must satisfy all three prongs to the test, otherwise the loan is not dischargeable.[10]

            Applying the Brunner test here, the district court in Kansas concluded, based on Metz’s income, necessary expenses, time remaining in her career before retirement, and her good faith effort of making loan payments, that requiring her to pay the remaining balance on her loans would be result in an undue hardship. The court emphasized her inability to afford one of the repayment plan options.[11] Furthermore, if she was able to find a way to afford a repayment plan, such payments would not even cover the interest on her loan and her balance would continue to grow.[12] Thus, the district court provided an example of what constitutes the narrow exception of undue hardship when it held Metz was discharged from repaying her loan,.

[1] See generally Educational Credit Mgmt. Corp. v. Metz, No. 18-1281-JWB, 2019 WL 1953119 (D. Kan. 2019).

[2] See id.

[3] Collier on Bankruptcy, ¶ 1.4.5 (Henry J. Sommer & Richard Levin eds., 16th ed. 2019), available at LEXIS, 1.4.5 Collier on Bankruptcy ¶ 1.4.5.

[4] See id.

[5] See Metz at *3 (quoting Brunner v. New York State of Higher Education Services, 831 F.2d 395, 396 (2d Cir. 1987).

[6] Id.

[7] Id.

[8] Id.

[9] Id. at *3.

[10] Id.

[11] Id. at *5.

[12] Id. at *5.