Uh-Oh–The First Loophole in Student Loan Debt

Carol Todd of Nottingham, Maryland, persuaded a bankruptcy judge in Baltimore to “discharge”–that is, wipe the slate clean on–nearly $340,000 in student loan debt. The grounds were that she has Asperger’s Syndrome, a mild form of autism that apparently prevents her from getting or keeping a steady job. U.S. Bankruptcy Judge Robert Gordon ruled on May 17 that Todd, now in her mid-60s, had met the rigorous “undue burden” exemption from the usual rule that student loans can’t be discharged in bankruptcy.

As might be expected, Gordon’s ruling has raised quite a few eyebrows, not least from those who wonder whether the judge has opened up a huge loophole in the “no discharge” rule that could allow people claiming chronic disabilities, ranging from diabetes to drug abuse to depression, to use bankruptcy court to avoid repaying their student loans. Since those loans, either made directly or guaranteed by the U.S. government, now cumulatively total $1 trillion, taxpayers could find themselves on the hook for billions if Gordon’s ruling sets a precedent. As blogger Edububble writes:

I’ve heard it said that practically everyone ends up with some kind of chronic condition by the age of 40. Some get diabetes sooner. Some get something else later. But our bodies have trouble making it to 65. I mention this unpleasant news because it seems like most people should be able to dig up some reason why they need to discharge their bills.

Compounding the situation is the fact that Asperger’s Syndrome is now so widely diagnosed that it has practically become a synonym for “computer genius with poor social skills.” Some 3 million to 9 million Americans are estimated to suffer from various levels of Asperger’s. Many of them are highly gifted cognitively, especially with respect to mathematical and scientific ability, and many perform well in school and successfully hold jobs in appropriate settings.

Carol Todd’s student-loan history is certainly an odd one. According to news reports summarizing Gordon’s ruling, Todd, who was 63 at the time of her student-loan discharge hearing in 2010, started pursuing higher education during the mid-1980s at age 39, when she received a GED degree. She obtained an associate degree and a bachelor’s degree from two private colleges, as well as two master’s degrees over the years from the public Towson State University in Maryland. In 1992 she enrolled at the University of Baltimore School of Law, although she never finished. She also received a Ph.D. from an unaccredited online school, in 2007. Two years later, in 2009, she filed for personal bankruptcy, listing $339,361 owing to three student-loan creditors.

The Hippies Who Beat the System

As most college students and their parents are grimly aware these days, discharging student-loan debt–unlike, say credit-card or even gambling debt–is exceedingly difficult.

That’s been the rule since 1976, when Congress began cracking down on hippie-era college students who piled up education loans and then sloughed them off in bankruptcy court a day or two after graduation. The culmination of this tightening of standards came with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which declared that student loans, whether from the government or from private lenders, can’t be discharged in bankruptcy unless the borrower can prove that repaying them would constitute an “undue burden.” It’s the same standard that applies to criminal fines and unpaid child support. For that reason courts have interpreted “undue burden” ultra-rigorously, usually requiring the debtor to prove a serious physical or mental disability.

On the one hand, Todd was able to focus well enough at her schoolwork to collect four degrees from accredited institutions (that’s not even counting her online doctorate). A cynic might say that she performed very well at her primary occupation for twenty years: going to school. On the other hand, Gordon noted in the written opinion that accompanied his ruling that on the witness stand Todd mentally collapsed at “seemingly innocuous questions.” He wrote: “[T]o expect Ms. Todd to ever break the grip of autism and meaningfully channel her energies toward tasks that are not in some way dictated, or circumscribed, by the demands of her disorder would be to dream the impossible dream.”

This raises the next question: How was Todd able to borrow tens of thousands of dollars in the first place to finance what proved to be a worthless education? That, of course, is a question that can be legitimately asked about many student loans these days, not just loans to those with Asperger’s. In the case of ordinary unsecured loans, such as credit-card loans, a lender can look at factors determining the borrower’s ability and willingness to repay: the borrower’s income and credit history, for example. The lender can accordingly adjust a loan limit up or down or deny the loan altogether. With loans to students it’s different. There usually is no credit history and often no income, either. There are few to no assets to seize if the loan goes into default and the creditor obtains a judgment.

Student lending is essentially a gamble upon the borrower’s good faith and future employment prospects, a gamble whose odds are compounded when the borrower, like Carol Todd, has a condition such as Asperger’s Syndrome. You can imagine the hell there would be to pay from disability-rights advocates–and also from enforcers of federal civil-rights laws–had Todd been denied a student loan because of her Asperger’s, or even been quizzed about possible mental disabilities on her numerous loan applications.

A Small Measure of Protection

It is not surprising, then, that Congress has tried to give student-loan providers a small measure of protection by assuring them that at least those loans won’t be dischargeable in bankruptcy except under extremely limited circumstances. That can have draconian consequences for borrowers, as many of this year’s debt-saddled college graduates filling out their job applications at Starbucks are learning to their chagrin. But it was an understandable move, given that ultimately, taxpayers are on the hook as guarantors of federally backed student loans. That probably includes much of the $440,000 that Carol Todd spent for two decades on degrees that she herself says she cannot use because of her disability.

The National Association of Consumer Bankruptcy Attorneys argues for repealing those non-dischargeability provisions, at least for private lenders. That is actually a good idea, as long as, on the public side, the federal government gets out of the student-loan business altogether. No direct lending, no loan guarantees to the private sector–and no disability-rights oversight, either. Without the twin safety nets of non-dischargeability and taxpayer guarantees, a lender would be entitled to ask the next Carol Todd, without even broaching the subject of her Asperger’s: “We’ve already lent you tens of thousands of dollars that you haven’t repaid on degrees that you haven’t used–why, exactly, should we lend you even more for yet another likely useless degree?” There would be nothing like having to live with the consequences of one’s imprudent lending decisions to put an end to irresponsible adventures in higher education at public expense.

Unfortunately, Judge Gordon’s ruling in Todd’s case seems to point in another direction: toward relaxing the non-dischargeabiity rules by judicial fiat, so that ever-large numbers of people can load their student debt onto the backs of taxpayers on the basis of some chronic ailment that should have barred their borrowing in the first place. That’s the worst of both worlds.