Bankruptcy Judge Says REPAYE is a Hopeless Strategy

A recent opinion written by United States Chief Bankruptcy Judge Somers is a fascinating read.

The bankruptcy judge excoriates the student loan position the government has held that student loans should not be discharged in bankruptcy. Of course, even that position goes against previous Department of Education advice that some federal student loans should be allowed to be discharged in bankruptcy.

He also slams the idea that people should be forced into Income-Driven Repayment (IDR) plans rather than having their debt discharged.

The written opinion from Judge Somers starts out by saying, “This student loan case fits the definition of insanity [“Insanity: doing the same thing over and over again and expecting different results.”].

“After consolidating his then-outstanding student loans in 1992 and later taking out six more student loans for further education between 2009-2013 in the combined principal amount of approximately $39,000, and making payments in excess of $28,000 on those loans, 56-year old Debtor-Plaintiff Jeffrey Goodvin finds himself in year 2020, seven years removed from his last educational stop, owing over $77,000. His payments of $19,527 on the $12,077 consolidation loan did not even pay the monthly accrual of interest, leaving Goodvin owing nearly $50,000. Little will change if Goodvin consolidates all these loans and enrolls in the income-driven REPAYE plan for twenty years—at which time Goodvin will have been retired for about ten years and be seventy-six years old. The REPAYE plan is the most “favorable” income-driven repayment plan available to Goodvin and the plan advocated by defendants for him to repay and discharge (by forgiveness) his student loan debt. Under the Brunner test, requiring Goodvin to continue paying on his 1992 consolidation loan imposes an undue hardship on him and denies him a fresh start. A partial discharge of Goodvin’s student loan debt is granted under § 523(a)(8).”

In this case, the Department of Education and ECMC insisted that Goodvin should consolidate all of his student loan debt and enter the REPAYE (Revised Pay as You Earn) plan at $157 per month.

The Judge wrote,”Based on his current budget, Goodvin has $209 of disposable income each month that he could apply toward his student loan debt. This is insufficient to repay his student loans. Defendants contend that Goodvin is eligible for consolidation of all his loans and can afford to pay $157 monthly— the current monthly payment calculated under the 20-year REPAYE plan. That is all true as far as it goes. This is less than half of what he was trying to pay collectively on his student loans through various repayment options. His difficulty in making nearly $400 monthly student loan payments likely explains why he has accumulated $20,000 in credit card debt. He liquidated a retirement account for a down payment to buy a very modest home to live in. He withdrew most of the funds from another retirement account to pay his bankruptcy attorney. In short, Goodvin has lived a lifestyle far-removed from excess; in theory his current monthly budget allows a $50 “cushion,” but he is unable to save for retirement in any significant way or repay his student loan debt.”

The Judge noted that while the Department of Education and ECMC attempt to paint the REPAYE as a solution to Goodvin’s struggles, “the REPAYE plan is not the panacea that defendants make it.”

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If the debtor did consolidate all his federal student loans together the Judge calculated his monthly interest charge would be about $400 on the now $77,270 balance.

Judge Somers said, “In short, the REPAYE plan acronym is a misnomer. In this case, it won’t even “repay” the interest accruing each month on the student loan debt. In the loan or finance context, repayment means paying the amount borrowed and the interest. And because the REPAYE plan does not apportion payments between principal and interest, but applies payments first to accrued interest, when the payment amount is less than the interest accrual, the REPAYE plan “repays” neither.”

Goodvin is currently 57-years-old and would only be calculated to work for another ten years. “At that point, his only income will be meager retirement funds and social security. He has already liquidated most of his modest prepetition retirement accounts, save for a $12,000 IRA from his time working for the City of Santa Barbara. He has been unable to save further for retirement in his monthly budget.”

If Goodvin’s loans are not discharged and he later defaults on his student loan debt then his small Social Security check he will depend on can be garnished. But in the IBR, with his reduced retirement income his REPAYE payment may be zero dollars a month. But so what. Judge Somers says, “In retirement then, Goodvin’s lower income is likely to result in a lower or zero payment under the REPAYE plan for the last ten years of the plan, while the balance of his student loan debt will continue to accrue interest and grow exponentially. He will likely have difficulty maintaining his current budget. This is the same situation Goodvin finds himself presently. The Court finds that Goodvin’s circumstances are likely to persist for a significant portion of the repayment period.”

Furthermore, “After twenty years he will not have repaid his student loan debt. Rather, Goodvin’s student loan debt will have ballooned even more. Goodvin’s reluctance to participate in the REPAYE plan for another twenty years is not a lack of good faith; it’s called hopelessness. The REPAYE plan effectively eliminates Goodvin’s fresh start, or at best, delays it until he is seventy-six years of age.”

The Judge came to a split decision. He said, “I conclude that requiring Goodvin to repay the ECMC consolidation loan imposes an undue hardship on him. It is discharged.” While “The remaining six student loans with a combined balance of approximately $27,689 are excepted from Goodvin’s discharge.” This reduces his total student loan debt owed from $77,270 and at least provides the debtor with some relief rather than the absurdity of enrollment in REPAYE for a life of student loan purgatory.

At least it appears if Goodvin made payments on his remaining student loans of $287 a month that he’d have the loans full repaid in ten years. And he still would not be able to save a penny towards retirement.