The Effect of Switching from a Brunner to a Totality Test for Student Loan Bankruptcy

Student loans are making headlines, whether they’re about the size of the debt, the companies collecting the debt, or the hardships faced by recent graduates paying their debt. Earlier this week, MarketWatch published an article highlighting two Supreme Court petitions filed by men trying to discharge their student loan debt, bringing the issue front and center yet again.

Both cases involve borrowers who have more than $200,000 in student loan debt – this is significantly higher than the typical debt load of $30,000. They’re asking the Supreme Court to review their cases with the intent of replacing the Brunner Test with the Totality Test when determining hardship and the ability to discharge student loan obligations. The Totality Test is a more lenient test for determining financial hardship, so it’s obvious why Robert Murphy and Mark Tetzlaff would prefer to use it. Should the Supreme Court take on these cases and provide a favorable ruling for Murphy and Tetzlaff on the use of the Totality Test, the precedent could alter a consumer’s ability to discharge student loan debt through bankruptcy, which would significantly impact tax payers, collection agencies, and future access to student loans.

On the one hand, providing students suffering from mounting student debt with greater ease of discharging their debt sounds great. It would allow these students the opportunity to have a fresh start and move on with their lives. Unfortunately, for every action, an equal and opposite reaction must occur.

Tax payers would be on the hook to cover student loans that were distributed by the federal government and discharged through bankruptcy. If the standard for discharging debt is lowered, then the amount of debt tax payers cover will have to increase. Considering student loan debt is more than $1.2 trillion, and the Consumer Financial Protection Agency claims a quarter of students are delinquent or significantly delinquent on their debt, this could lead to a tax payer cost of approximately $400 billion, which is no small sum.

As for collection agencies that service these accounts, they would have to limit the amount of business they can take on if it becomes easier to discharge debt through bankruptcy. This would also lead to a reduction in the number of firms that depends this market, which would decrease the labor force.

Finally, those seeking student loans in the future would suffer the most. In order to offset the increased risk of loans not being repaid, several scenarios could play out:

1) If the burden is pushed toward schools, they would pass it on to students by increasing the cost of school to account for the risk.

2) If the burden is pushed on the borrower, interest rates would likely increase to offset the risk.

3) If the burden is pushed on the borrower, there would likely be a greater need for a cosigner to put collateral against the cost to account for the risk.

Regardless of what happens, an increase in the risk of loans being discharged through bankruptcy would have a negative impact on future student loan borrowers.

Requiring individuals to abide by strict repayment standards for student loans may sound harsh. Nevertheless, it is likely the best course of action. Any deviation from this course will have a negative impact on tax payers, businesses like collection agencies, and future loan borrowers. Alternatives such as extending payment schedules, reducing interest rates, or incentivizing students to pay off loans more quickly are all other options that should be considered before providing greater ease of discharging debt through bankruptcy.