Oregon man's case highlights hard road to student loan relief
A recent ruling in a decade-old legal battle between Pennsylvania's leading student loan agency and an Oregon law school graduate shows that while it can be difficult, it's not impossible to discharge student loans in a bankruptcy.
Michael Hedlund, a 1997 graduate of Willamette University in Salem, Ore., borrowed about $85,000 through the Pennsylvania Higher Education Assistance Agency, which serves millions of students nationwide through its loan programs.
After failing the bar exam twice — then locking his keys in his car and missing his third attempt — Hedlund accepted a $40,000-a-year job as a probation officer.
Unable to make his loan payments, Hedlund unsuccessfully attempted to negotiate a better payment schedule with PHEAA, according to court documents. He offered $5,000 up front, with reduced monthly payments. PHEAA, however, asked for $10,000 up front with $1,300 per month in payments, or an $80,000 lump-sum payment.
In 2003, with a wife and three children to support, Hedlund filed for bankruptcy protection when PHEAA began to garnish $250 per month from his wages. A bankruptcy judge eventually forgave all but $32,000 of Hedlund's student loan debt, but PHEAA appealed to a district court and won.
Hedlund appealed that decision, and the 9th Circuit Court in San Francisco ruled in his favor, stating that his debt should be partially forgiven because he passed the three-point Brunner Test, which is necessary to erase student loans. Namely:
• He made a reasonable, good-faith attempt to repay the money.
• He couldn't earn enough to maintain a basic standard of living while repaying the debt.
• It was unlikely that his earning potential would increase significantly in the future.
The test was established in 1985 when student Marie Brunner attempted to discharge loans obtained through the New York State Higher Education Services Corp. She was unsuccessful when the district court that came up with the three-pronged test said she did not meet its standard.
Although PHEAA spokesman Keith New would not comment about the California ruling, it has sparked spirited online debates involving students, parents, lawyers and others about whether the debt should have been forgiven and if it sets a precedent for other students struggling to repay school loans.
An extremely rare case
The ruling has prompted varying opinions from the legal community about its impact.
Hedlund's attorney, Derek Foran, said the decision is important for other student debtors because it makes the standard clearer in determining undue hardship in bankruptcy, and makes the appeals process simpler for the debtor.
“The ... decision will benefit student loan debtors — who often are underrepresented — seeking relief in bankruptcy court,” he said. “Since the decision, debtors similarly situated to Michael have reached out to us.”
Although Hedlund's case was heard in the Ninth Circuit Court, which covers nine western states including Alaska and Hawaii, Duquesne University law professor Mark D. Yochum said lawyers in other circuit courts will undoubtedly cite the ruling in their arguments.
But, Yochum said, it is still extremely rare to get forgiveness of student loans in bankruptcy court.
Samuel L. Bufford, a professor at Dickinson School of Law and a former bankruptcy judge, said Hedlund's story is unique and involved a very specific set of circumstances revolving around his inability to earn more as an attorney and the level at which his wages were garnished.
Some attempts have been made to lighten student debtors' loads through lending reform.
The Private Student Loan Bankruptcy Fairness Act of 2012 is a bill in the U.S. House, and a similar bill, Fairness for Struggling Students Act, is in the Senate. Both measures would allow debtors to have private student loans forgiven under certain circumstances. Federal loans are not addressed in either measure.
PHEAA has a contract with the federal government and private companies to service student loans, while administering the Pennsylvania State Grant and other state-funded student aid programs.
Through its loan servicing operations, PHEAA handles about $228 billion, or 11 million borrowers.
In 2010, there was a 6.1 percent default rate among PHEAA borrowers, compared with a 9.1 percent default rate nationally, according to the Department of Education. In all, $39 billion worth of debt is in default through PHEAA-guaranteed loans.
‘All or nothing'
Most loan programs allow students to take part in an income-based repayment system. Such a system lowered Duquesne Law School graduate Zach Strohm's monthly payments from $1,300 to $300.
He graduated in 2012 with $100,000 in loans and is a lobbyist with Gmerek Government Relations in Harrisburg, a position that does not require a law degree.
“I look back on it now and I wonder if I really wasted three years of my life,” Strohm said. “I'm working with something I could have done straight out of undergrad. But I know with my job I have an edge on certain people because I have a law degree.”
According to the National Association of Consumer Bankruptcy Attorneys, four out of five bankruptcy attorneys have reported an increase in student loan debtors seeking help, but few of those debtors are believed to have any chance of their loans being discharged because of hardship.
Larry Young, an attorney with CGA Law Firm in York County, said the 3rd Circuit Court of Appeals, which includes Western Pennsylvania, has said it's “all or nothing” when ruling on whether to discharge student loans in bankruptcy. Either the loans are completely forgiven, or they are kept in place.
The 3rd Circuit's test for evaluating “undue hardship” is so difficult to meet that “if you're breathing, you can't prove an undue hardship,” Young said.
Some students think that the hardship test is unfair and that only loan companies benefit from it.
Chelsea Blake graduated from Point Park University in 2011 with a degree in business management and $50,000 in student loans, some at a 9 percent interest rate.
She has to keep her job as an assistant manager at Barnes & Noble instead of taking a chance on a job in her field, because she earns $12.50 an hour with benefits, something that's not always guaranteed by the companies where she has applied for jobs.
“When you first are trying to figure out how to go to college you're not really thinking about paying them,” she said of the loans. But now, her $325- a-month payment keeps her from purchasing her own car or moving out of her parents' home in Brookline. “I just feel like the student doesn't realize how much debt they're going to be in.”
Reporter Nicole Chynoweth contributed to this report. Kate Wilcox and Kari Andren are staff writers for Trib Total Media. Wilcox can be reached at 724-836-6155 or email@example.com. Andren can be reached at 724-850-2856 or firstname.lastname@example.org.
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