Calvin Murrell was thrown out of work in 2000 due to knee and back injuries. Murrell then attended Stautzenberger College, a private, for-profit community college with a total enrollment of around 300 students. He obtained a degree in web tech at Stautzenberger and then attended Spring Arbor College and Owens Community College, but he failed to complete programs at these schools.
Murrell took out almost $73,000 in student loans to finance his college studies, and in 2018, he tried to discharge this debt in bankruptcy. He maintained that being forced to repay this debt would create an “undue hardship.”
Judge John Gustafson, an Ohio bankruptcy judge, applied the three-part Brunner test to determine whether it would impose an undue hardship on Murrell if he were forced to repay his loans.
“Under the Brunner test,” Judge Gustafson instructed, “the debtor must prove each of the following three elements: (1) that the debtor cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for [himself] and [his] dependents if forced to repay the loans; (2) 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 (3) that the debtor has made good faith efforts to repay the loans.”
To obtain a discharge of his student loans, Murrell was required to prove all three elements of the Brunner test. Educational Credit Management Corporation opposed the discharge, arguing that Murrell failed to pass any of the Brunner test’s three elements. ECMC produced a witness who testified that Murrell was eligible to participate in an income-based repayment plan (IBRP) that would require him to pay between $63 and $94 a month.
Judge Gustafson observed that Murrell’s family income was about $44,000, consisting of $32,893 earned by Murrell’s wife and $13,068 in Murrell’s Social Security Disability payments. Judge Gustafson concluded that with a little belt-tightening, Murrell and his wife could make monthly student-loan payments of $63 to $94 a month and still maintain a minimal standard of living. Therefore the judge refused to discharge Murrell’s student loans in bankruptcy.
In my view, Judge Gustafson misapplied the Brunner test when he ruled that Murrell’s student loans were nondischargeable. The Brunner test does not ask whether a debtor can maintain a minimal standard of living if required to make token loan payments under an income-based repayment plan. Rather it asks whether the debtor can pay off the student loans and maintain a minimal standard of living.
If Murrell signs up for an IBRP that requires him to pay $63 per month for 25 years, he will never pay off his student loans. Quite the contrary; his student-loan debt will grow larger with each passing month.
Let us assume Murrell makes monthly payments of $63 under an IBRP. And let us further assume that his student-loan debt accrues interest at 5 percent. Interest at that rate on $73,000 amounts to $304 a month–almost five times the amount of his monthly payments.
Under an IBRP, Murrell’s debt will negatively amortize as unpaid interest accumulates and becomes capitalized. Thus, the $73,000 dollars Murrell owes in 2019 will grow to a much larger number by the time 25years have passed.
The essence of Judge Gustafson’s ruling is that no one is eligible to discharge student loans in bankruptcy because it is always possible to make token monthly payments under an IBRP. Indeed, debtors in IBRPs who are unemployed and have no income are not required to make any payments on their loans.
Currently, there are 8 million student-loan debtors enrolled in IBRPs. Virtually none of these people are paying down the principal on their loans. When their repayment obligations come to an end–after 20 or 25 years–they will owe considerably more than they borrowed. This amassed debt will be forgiven, but the amount of the forgiven loans will be taxable to them as income.
This is insane. The only purpose of these income-based repayment plans is to hide the amount of student-loan debt that is not being paid off–hundreds of billion dollars.
Murrell v. Educational Management Corporation, 505 B.R. 464 (Bankr. N.D. Ohio 2019).