21 February 2018

The DOE, Student Loans, and the Meaning of Undue Hardship: Part 1

The internet has been abuzz with reports like this one in the Wall Street Journal unhelpfully headlined "Trump Administration Looking at Bankruptcy Options for Student Debt." Taking the time to go here and then read the Request for Information one finds less bite than bark. The Request is merely that, a request. In other words, it's not a proposal for a rule because, as the DOE recognizes in the Request, Congress has not delegated any rulemaking authority to the DOE with respect to defining undue hardship.

So what is the DOE requesting? 
Comment on, and offer information regarding: (1) factors to be considered in evaluating undue hardship claims; (2) weight to be given to any such factors; (3) whether the use of two tests results in inequities among borrowers; (4) circumstances under which loan holders should concede an undue hardship claim by the borrower; and (5) whether and how the 2015 Dear Colleague Letter should be amended.
Why does the DOE want our comments on the factors of undue hardship if it lacks the power to turn them into a rule?
The Department will review the data collected to determine whether there is any need to modify how undue hardship claims by student loan borrowers in bankruptcy are evaluated.
Which then invites the question, to what end does the DOE "evaluate" claims of undue hardship? Reading earlier in the Request we learn than when the DOE believes that an applicant has met the (undefined) standard of undue hardship the DOE requires "holders" of the student-loan debt "to determine whether requiring repayment would constitute an undue hardship." If the answer is yes, then "the holder must concede an undue hardship claim" in bankruptcy.

Thus, even though the DOE cannot directly define undue hardship by rule, it accomplishes the same end indirectly with respect to borrows in bankruptcy. "Holders" presumably include the Federal government for direct student loans as well as private lenders. Presumably--and I don't know if this is true--the DOE has some sort of leverage over private lenders by guaranteeing or otherwise permitting such lenders to be in the student loan business although I'm not sure how this is done.

So, when all is said and done, I'm not sure how much effect this Request will have. Here's betting not too much. Sorry. Sort of.

By the way, did you notice point (5) in the Request? More about that later.

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