Discharging Health Education and Other Government-related Student Loans
The Department of Education and the HEAL Loan Program
Congress—as well as former President Jimmy Carter—established the U.S. Department of Education (DOE) on May 4, 1980, pursuant to the Department of Education Organization Act.3 Under this law, the DOE's mission is to:
- strengthen the federal commitment to assuring access to equal educational opportunity for every individual;
- supplement and complement the efforts of states, the local school systems and other instrumentalities of the states, the private sector, public and private nonprofit educational research institutions, community-based organizations, parents and students to improve the quality of education;
- encourage the increased involvement of the public, parents and students in federal education programs;
- promote improvements in the quality and usefulness of education through federally supported research, evaluation and sharing of information;
- improve the coordination of federal education programs;
- improve the management of federal education activities; and
- increase the accountability of federal education programs to the President, Congress and the public.4
One of the primary means by which the DOE has historically sought to accomplish its goals is by providing educational loans to persons seeking
a college education. DOE will provide more than $67 billion in student loans this year, about 70 percent of all student aid, to help millions of students and families pay for postsecondary education.5
Federal Student Aid (FSA) programs are the largest source of college financial assistance provided by the DOE each year, providing billions of dollars in funding. DOE's student aid programs take many forms: gifts in the form of grants (money that does not have to be repaid), self-help aid in the form of work study (job earnings) and through loans (money that must be paid back with interest).6 The FSA programs consist of: (1) Pell grants; (2) Stafford loans, available either through the Federal Family Education Loan (FFEL) Program or the Direct Loan (DL) Program©; (3) PLUS loans for parents (also available through the FFEL or DL programs); (4) consolidation loans (FFEL or DL); (5) federal work study (FWS); and (6) Perkins loans or Federal Supplemental Educational Opportunity Grants (FSEOG). The last three—FWS, Perkins loans and FSEOG—are known collectively as the campus-based programs. Loans through the DL Program come directly from the federal government, while loans through the FFEL Program come from private lenders.
In addition to clients with these loans, however, bankruptcy practitioners may come into contact with persons seeking debt relief that owe a type of loan no longer offered by the DOE, namely HEAL loans. It is critical for bankruptcy practitioners to understand that the discharge of HEAL loans is governed by an entirely different standard than other government-based student loans.
The HEAL loan program was authorized by the Public Health Service Act (42 U.S.C. §292, et. seq.) in 1978, and was a federally insured loan program patterned after the Guaranteed Student Loan Program (GSLP). The HEAL loan program was an option for health care-profession students who needed to borrow substantially more money to fund their education than normally allowed under the borrowing limit of the GSLP program. The HEAL program authorization for new loans lapsed at the end of fiscal year 1995. Accordingly, no new HEAL loans are being made. However, because the repayment period for HEAL loans was authorized to extend as long as 33 years, bankruptcy practitioners representing health care professionals may well be called on to address HEAL loan issues for the next few decades.
HEAL loans were available to full-time graduate students in the schools of medicine, osteopathic medicine, dentistry, optometry, pharmacy, podiatric medicine, veterinary medicine, public health and chiropractic or graduate programs in health administration or clinical psychology. The Public Health Service of the HHS administered the HEAL program using a tri-party arrangement: (1) private lenders made the loans, (2) schools administered the applications and disbursements, and (3) HHS guaranteed the loans. The lender paid HHS an insurance premium, which lenders usually passed on to the borrower through a deduction in the loan amount. The premium was deposited in the Student Loan Insurance Fund (SLIF). HHS administers the SLIF and uses it to pay insurance claims.
HEAL loans were available for tuition, educational expenses and reasonable living expenses for students who were in need of funds. A student applied for a HEAL loan through the financial aid office of his or her school. The school, in turn, submitted the student's application to an eligible HEAL lender. If the lender determined that the student was creditworthy, it approved the application and sent the check to the school and the student. Lenders often sell their HEAL loans to the Student Loan Marketing Association (Sallie Mae), a secondary loan market established by statute. Interest began to accrue on the day the HEAL loan was disbursed and ended—or will end—when the loan is fully repaid.
After the borrower's graduation or departure from school, the lender established a repayment schedule, which begins after a nine-month grace period. The borrower has up to 33 years, excluding any deferment or forbearance periods, in which to repay a HEAL loan. Lenders must perform numerous acts of due diligence during collection, including use of collection agents and reporting delinquency to credit bureaus. If the HEAL borrower fails to make the loan payments on time, the total amount of the indebtedness may be increased by additional interest, late charges, attorney's fees, court costs and other collection charges.7
Generally, lenders are required to obtain a judgment against a delinquent borrower before filing a default claim with HHS. When a lender has complied with the terms of the HEAL insurance contract, the statute and the regulations, HHS will pay off the lender's loss in principal and interest upon the default, bankruptcy, death or permanent and total disability of a borrower. Upon payment of a claim, HHS receives an assignment of the promissory note or judgment and becomes the borrower's direct creditor.
In summary, bankruptcy practitioners who have clients in health care fields with outstanding student loans should get copies of any and all paperwork associated with the debt to determine the nature of the obligation. As discussed below, the difference between how federal law treats ordinary government-related student loans and HEAL loans is supposedly quite dramatic.
Student Loans and the Code
Section 523(a)(8) is the primary provision of the Bankruptcy Code that controls when a debtor may obtain a discharge of his or her government-related student loans. In full, this statute reads as follows:
§523. Exceptions to discharge(emphasis added). The burden is on the debtor/plaintiff to establish that she is entitled to a hardship discharge.8 One author has identified at least six undue-hardship tests,9 though it appears that two tests, the "Brunner test" and the "totality-of-the-circumstances test," have emerged as the primary methods of judicial interpretation of §523(a)(8).(a) A discharge under §727, 1141, 1228(a), 1228(b) or 1328(b) of this title does not discharge an individual debtor from any debt—
(8) for an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents[.]
The Second Circuit was the first U.S. Court of Appeals to discuss the meaning of the term "undue hardship" in §523 in In re Brunner, decided in 1987.10 Under the Brunner test, a government-related student loan can be discharged only if a debtor can establish:
- that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself or her dependents if forced to repay the loans;
- that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
- that the debtor has made good-faith efforts to repay the loans.11
In the Eighth Circuit, a "totality of the circumstances test" is used to determine whether it would be an "undue hardship" on a debtor to require her to repay the student debt she owes.13 This test requires the bankruptcy court to examine the totality of the circumstances, "with special attention to" (1) the debtor's current and future "reasonably reliable financial resources;" (2) the debtor's and his or her dependents' reasonable, necessary living expenses and (3) "any other circumstances unique to the particular bankruptcy case."14 Regarding the first and second factors, the debtor should demonstrate that she has "done everything possible to minimize expenses and maximize income," and the possibility of changes in the future should also be presented.15
Many courts assessing the question of undue hardship under the totality-of-the-circumstances approach have resorted to a list of factors as a guide. Factors to be examined include:
- total incapacity now and in the future to pay one's debts for reasons not within the control of the debtor;
- whether the debtor has made a good-faith effort to negotiate a deferment or forbearance of payment;
- whether the hardship will be long-term;
- whether the debtor has made payments on the student loan;
- whether there is permanent or long-term disability of the debtor;
- the ability of the debtor to obtain gainful employment in the area of study;
- whether the debtor has made a good-faith effort to maximize income and minimize expenses;
- whether the dominant purpose of the bankruptcy petition was to discharge the student loans; and
- the ratio of the student loan to the total indebtedness.16
The Discharge of HEALLoans
While the question of whether most student loans can be discharged in bankruptcy turns on one of the "undue hardship" tests discussed above, the discharge of HEAL loans is not governed by §523(a)(8) and the case law interpreting it. Congress included a specific provision in the Public Health Services Act, 42 U.S.C. §292f(g) that governs the discharge in bankruptcy of HEAL loans. The HEAL statute provides as follows:
(g) Conditions for discharge of debt in bankruptcy. Notwithstanding any other provision of federal or state law, a debt that is a loan insured under the authority of this subpart may be released by a discharge in bankruptcy under any chapter of Title 11, only if such discharge is granted—Federal courts have consistently held that with respect to HEAL loans, the bankruptcy provision of the HEAL statute, 42 U.S.C. §292f(g), supersedes the general provision for student loans found at 11 U.S.C. §523(a)(8).19(1) after the expiration of the seven-year period beginning on the first date when repayment of such loan is required, exclusive of any period after such date in which the obligation to pay installments on the loan is suspended;
(2) upon a finding by the bankruptcy court that the nondischarge of such debt would be unconscionable; and
(3) upon the condition that the secretary shall not have waived the secretary's rights to apply subsection (f) of this section to the borrower and the discharged debt.18
Section 292f(g) requires three conditions to be satisfied before a HEAL loan may be discharged. First, seven years must have passed since the repayment of the loan became due, excluding any period during which the repayment obligation was suspended. Second, the bankruptcy court must make a finding that failure to discharge the debt would be unconscionable. Third, the secretary of the Department of Health and Human Services must not have waived certain setoff rights due from future federal payments for health services. These requirements are written in the conjunctive; all three requirements must be satisfied in each case. The case law establishes that "any debtor...seeking to discharge a HEAL loan...must meet the three requirements specified in §292f(g).20 Thus, a debtor's HEAL loans may be discharged only if all three of the specific conditions set forth by Congress for such discharge are met. The burden is on the borrower, as the plaintiff, to request a determination of dischargeability of a HEAL loan.21
The "unconscionability" test requires a debtor to prove more than he or she would have to establish under the ordinary hardship discharge standard.22 As the Eighth Circuit Bankruptcy Appellate Panel has noted, the "standard of dischargeability of HEAL loans vs. non-HEAL loans is dramatically different. The bankruptcy court [is] required to apply the almost insurmountable unconscionability standard to determine dischargeability of...HEAL loans."23 It remains unclear under existing case law, however, exactly what this means.
To date, only two appeals courts have interpreted the meaning of the term "unconscionable" as used in §292f(g). Both courts clearly held that the term imposes an extremely high burden on a debtor.
In In re Rice,24 debtor Ronald Rice sought to discharge approximately $20,000 in HEAL loans he had obtained while he was a student at the Medical College of Ohio. Rice did not finish his education, and after numerous forbearances, he defaulted on his HEAL loans and had a judgment taken against him for more than $60,000 because he had made only $55 of payments in 10 years. By the time he filed an adversary proceeding in bankruptcy to try and escape his obligation to repay the HEAL loans, the debt had grown to over $77,000. At the time he filed for chapter 7 relief, Rice held a master's degree and was employed as a schoolteacher, and his combined household income, including his wife's salary from Bowling Green State University, was more than $60,000.
The bankruptcy court issued a rather curious decision. It first observed that Rice claimed monthly expenses in his pleadings that were 45 percent higher than those set forth in his schedules. Applying various analytical tests, it held that Rice was not entitled to a discharge of his HEAL loans under any standard. Inexplicably, the court then granted a discharge of over $50,000 of Rice's debt—under its "equitable powers" under 11 U.S.C. §105(a)—to avoid inflicting an unconscionable hardship on Rice's dependents. The district court reversed, holding that the lower court exceeded its statutory authority, and left the HEAL loan debt intact.
When Rice appealed, the Sixth Circuit noted that by using the term "unconscionable" in §292f(g), Congress intended to greatly restrict the conditions under which HEAL loans could be discharged. Further, the Rice court adopted the ordinary meaning of the term, namely "excessive, exorbitant," "lying outside the limits of what is reasonable or acceptable," "shockingly unfair, harsh or unjust" or "outrageous." The court instructed bankruptcy courts to examine the totality of the circumstances to assess whether nondischarge of the HEAL loan debt was unconscionable.25
The Rice court labeled the first part of its test as a review of "objective factors," such as "the debtor's income, earning ability, health, educational background, dependents, age, accumulated wealth and professional degree." Next, the court advised that the amount of the debt, the rate at which interest is accruing and the debtor's claimed expenses and standard of living should be reviewed. Specifically, the income/standard-of-living analysis is to ascertain whether the debtor has tried to minimize household expenses, whether the debtor's financial condition is likely to continue or improve, and whether the debtor has tried to maximize his income. Efforts to maximize income are not limited under this test to the debtor's primary job, but must also explore "whether the debtor is capable of supplementing his income through secondary part-time or seasonal employment."26
The final factor identified by the Rice court is an examination of the debtor's good faith, in relation to the objective factors addressed earlier. The good-faith test requires the court to:
examine the debtor's previous efforts to repay the HEAL obligation, including the debtor's financial situation over the course of time when payments were due; the debtor's voluntary undertaking of additional financial burdens despite his knowledge of his outstanding HEAL debt; and the percentage of the debtor's total indebtedness represented by student loans.27
The debtor failed to satisfy the Rice court's unconscionability test. First, his household income and expenses established that repaying the loans would not force his family to maintain a standard of living near or below the poverty level. Secondly, the amount of the debt was largely the debtor's own doing, because he made almost no effort to repay the HEAL loans over the course of 17 years and established no dire financial circumstances that prevented him from making greater payments. Third, the fact that the HEAL loans comprised most of Rice's indebtedness weighed against him. The court found no basis to discharge the debt under the HEAL loan statute.
[T]he analyses employed by the courts to assess the dischargeability of HEAL and non-HEAL loans seems at odds with the text of each statute.
The Rice court also addressed the bankruptcy court's decision to use its "equitable powers" to eliminate most of the HEAL loan debt to prevent hardship to the debtor's children. In no uncertain terms, the court noted that the equitable powers of a bankruptcy court cannot conflict with either the Bankruptcy Code or other federal statutes. It also noted that while impact of repayment on a debtor's dependents is part of the statutory analysis, the courts are to be "unforgivingly critical" in its analysis of expenditures. After all, the court explained, it is only fair to require a debtor and his family to make some sacrifices and endure a lower standard of living than they might prefer because to "hold otherwise would be unfair to the creditor, who has no control over the debtor's decisions regarding the undertaking of familial obligations."28 Thus, §292f(g) does not permit two different standards, one for the debtor and one for the dependents. "[P]erceived unfairness to the debtor's dependants," who in this case were receiving a private education and enjoyed family vacations, does not permit a court to use its equitable powers under 11 U.S.C. §105(a) to reduce an otherwise nondischargeable loan.
In U.S. Department of Health and Human Services v. Smitley,29 the Fourth Circuit essentially adopted the Rice approach. Smitley is noteworthy by itself, however, for two reasons. First, it instructs that if a court is faced with assessing the propriety of discharging both non-HEAL and HEAL loans, then it should initially engage in the "undue hardship" analysis of the non-HEAL loans because, if these loans are discharged, it could affect the higher unconscionability analysis. Secondly, unlike Rice, Smitley was not a unanimous decision, and the dissent shows how jurists can, under the same set of facts, reach vastly different results in their analysis.
Neither Rice nor Smitley provide much guidance on how the "unconscionability test" differs from the "undue hardship" standard, though both cases specifically hold that the unconscionability test imposes a higher burden on the debtor. Insofar as many "undue hardship" cases require the debtor to establish that repayment would be hopeless, or nearly hopeless, it is difficult to picture what more a debtor would have to prove to establish that his repayment situation was out of the realm of "undue hardship" and into the realm of "unconscionability." The only level of greater futility left above hopelessness seems to be the realm of the "impossible," and it is unlikely that Congress had such a test in mind when it enacted either §523(a)(8) or §292f(g).
It might be useful in future analyses under these two provisions to return to the text of the statutes for additional guidance. Section 523(a)(8) instructs that the debtor must prove that excepting his or her student loans from discharge would be an "undue hardship." Section 292f(g) requires a debtor to prove that it would be unconscionable to hold a debt nondischargeable. Both tests require the courts to assess what impact it would have on the debtor and his family if the debt involved was not discharged. Courts have not approached either statute from this perspective.
When applied to a HEAL loan, the text requires a debtor to prove that allowing the debt to remain on the creditor's books will somehow operate in an unconscionable manner upon him. The statute does not require a debtor to show that forcing him to make full payment on a monthly basis under his or her current circumstances would be unconscionable. Thus, courts should assess what impact the failure to discharge the debt will have on the debtor. How will it affect his or her ability to obtain credit needed for the support of the debtor and his dependents? How will the remedies available to the institutional lender potentially impact the debtor's ability to provide for himself and his loved ones? How will it affect the debtor psychologically to have the debt remain hanging over his head if he does not now have—and is unlikely to ever have—the ability to repay it? Each of these questions properly focuses on what the text of §292f(g) requires, analyzing the effect that not discharging the debt will have on the debtor and his or her dependents. While the "totality-of-the-circumstances" approach set forth by Rice properly permits the courts to evaluate a broad range of evidence during its inquiry, it should be refined to focus on the effect that not granting the discharge will have on the debtor, as the text requires.
This approach should not be limited solely to use in §292f(g) cases. Indeed, the appropriate question to ask under each statute is not whether requiring the debt to be repaid in full will harm the debtor, but whether leaving the debt undischarged will cause the debtor some "undue" or "unconscionable" hardship, above and beyond the normal hardship associated with having unpaid bills. If the interpretation of the two statutes is approached from this perspective, courts may be better able to make a more vivid distinction between the requirements of §523(a)(8) and §292f(g).
The foregoing analysis explains that it is supposed to be much more difficult for debtors who hold HEAL loans to discharge their obligations to their lenders than it is for them to discharge other government-related student loans. However, the differences between the two standards remain vague—and the analyses employed by the courts to assess the dischargeability of HEAL and non-HEAL loans seem at odds with the text of each statute. While practitioners should be careful to form their student loan discharge arguments based on existing case law, they may well wish to consider arguing that the proper analysis under each statute be based on the impact the failure to discharge the debt at issue will have on the debtor and his dependents, as the text of each statute requires, rather than focusing on the impact requiring full repayment of the debt will have on the debtor and his family, as most courts currently require. Only by following a mode of analysis more firmly rooted in the texts of 11 U.S.C. §523(a)(8) and 42 U.S.C. § 292f(g) will the courts be following congressional intent and be able to better draw a meaningful distinction between the two statutes.
1 Assistant U.S. Attorney, Southern District of Iowa; J.D. (1989) Washington University; M.A. (1986 - sociology) and B.A. (1984 - journalism) Eastern Illinois University; former chair of South Dakota Bankruptcy Fraud Task Force (1992 - 2001); former law clerk (1989 - 91) to the late Hon. Frank W. Koger, U.S. Bankruptcy Judge, W.D. Mo. The views expressed in this article are solely those of the author and should not be attributed to the U.S. Department of Justice, the U.S. Attorney for the Southern District of Iowa or any other person or entity associated with him. Return to article
2 See In re Hines, 63 B.R. 731, 733 (Bankr. D. S.D. 1986) (Ecker, J.); In re Hampton, 47 B.R. 47, 50 (Bankr. N.D. Ill. 1985); In re Rice, 171 B.R. 989, 991-992 (Bankr. N.D. Ohio 1993). Return to article
8 Andrews v. South Dakota Student Loan Assistance Corp. (In re Andrews), 661 F.2d 702, 704 (8th Cir. 1981); Ford v. Student Loan Guarantee Found. of Arkansas (In re Ford), 269 B.R. 673, 675 (8th Cir. BAP 2001). Return to article
9 See Pashman, "Discharge of Student Loan Debt Under 11 U.S.C. §523(a)(8): Reassessing 'Undue Hardship' after the Elimination of the Seven-year Exception," 44 N.Y.L. Sch. L. Rev. 605, 608-619 (2001). Return to article
12 Brightful v. Penn. Ed. Assist. Agency, 267 F.3d 324 (3rd Cir. 2001); Ekanasi v. The Ed. Resources Inst., 325 F.3d 541 (4th Cir. 2003); In re Gerhardt, 348 F.3d 89 (5th Cir. 2003); Goulet v. Ed. Credit Manag. Corp., 284 F.3d 773 (7th Cir. 2002); In re Rifino, 245 F.3d 1083 (9th Cir. 2001); Ed. Credit Manag. Corp. v. Polleys, 350 F.3d 1302 (10th Cir. 2004); In re Cox, 338 F.3d 1238 (11th Cir. 2003). Return to article
16 In re Morris, 277 B.R. 910, 914 (Bankr. W.D. Ark. 2002); In re Fahrer, __ B.R. __, 2004 WL 557292 (Bankr. W.D. Mo. 2004); In re Morgan, 247 B.R. 776, 782 (Bankr. E.D. Ark. 2000) (citations omitted). Return to article
19 11 U.S.C. §523(a)(8). See In re Hines, 63 B.R. 731, 733 (Bankr. D. S.D. 1986) (Ecker, J.); In re Hampton, 47 B.R. 47, 50 (Bankr. N.D. Ill. 1985); In re Rice, 171 B.R. 989, 991-992 (Bankr. N.D. Ohio 1993). Return to article
22 U.S. Dept. of Health & Human Services v. Smitley, 347 F.3d 109, 116 (4th Cir. 2003) ("The unconscionability standard is stringent, demanding more than the "undue hardship" standard for the discharge of educational loans under §528(a)(8)"). Return to article
23 In re Long, 271 B.R. 322, 330 (8th Cir. BAP 2002) (affirming decision not to discharge HEAL loans under unconscionability test and decision to permit discharge of other student loans under undue hardship standard). Return to article