Tuesday, Supreme Court justices considered Espinosa's case in a closely watched dispute that could affect debtors and creditors nationwide when student loans cannot be repaid.
Federal law says no student loan may be wiped out through bankruptcy unless the student proves an "undue hardship" in a court hearing with the institution that loaned the money. Notifying the creditor through a bankruptcy petition is usually not enough.
The idea, Justice Department lawyers say, is that the elimination of student debt should not be a matter of routine bankruptcy. Siding with Espinosa's creditor, they note the Department of Education reinsures student loans to guarantee they get repaid. Congress feared that without such guarantees and a difficult process for unloading debt, most lenders would refuse to fund higher education.
The justices struggled with the obligations of each side of a loan. Many, including Justices Ruth Bader Ginsburg and Anthony Kennedy, suggested they sought a balance between allowing debtors to readily discharge loans and requiring formal hardship hearings even when a creditor accepts a debtor's bankruptcy plan.
A lower U.S. appeals court ruled last year that in Espinosa's case it was enough that the creditor, United Student Aid Funds, was alerted to his bankruptcy petition in 1992 and did not object at the time to the bankruptcy plan. The decision by the U.S. Court of Appeals for the 9th Circuit, based in San Francisco, would open the door to easier elimination of student debt.
Appealing the ruling, lawyer Madeleine Wanslee for United Student Aid Funds, a large non-profit corporation, said student loans — like several other categories, including child support — cannot be eliminated without a hardship hearing. Congress, not individual judges, should set the rules, she said.
NPR: High Court Hears Student Loan Bankruptcy Case
Discussions at SCOTUS Blog: Court to Hear Student Loan Bankruptcy CaseUnited Student Aid Funds, Inc. v. Espinosa, Argument Preview
Student loans are a way of life in America, and the federal government guarantees most of those loans. The question now before the Supreme Court is what the obligations of the lender and the borrower are when a student can't pay.
More than a third of students enrolled in post-high school classes borrow money to advance their education. The federal government guarantees most student loans to the tune of $618 billion. To prevent people from just walking away from their obligation, federal law makes it hard to discharge a student loan debt (that is, not pay for it). The bankruptcy code allows discharge only in cases of undue hardship, but the code does permit restructuring of a debt to make it repayable.
Editorial: Court should rule in favor of lender in student loan case
Guidelines are in place for the system to bend for those debtors experiencing exceptionally hard times -- not for those that were seeking an easy way out of debt.
Taking personal responsibility for one's actions is a lesson that must be learned by all Americans if a stable economy is the goal.
Holding all debtors -- from vast corporations to students -- accountable must be a priority for a progressive track toward an economically minded population to develop.
In times when economic regrowth is at the forefront, fostering monetary responsibility in both government and citizens is crucial.