Accepted wisdom says that there are only two (rather sobering) ways to relieve the burden of student debt: either pay it off, or depart from this earthly world.
On May 22 the Ninth Circuit Court of Appeals wiped out $58,000 in student loan debt for a former law student in bankruptcy proceedings, sending shockwaves through the formerly impervious facade of student loan debt performance.
Ten years in the making, the ruling could burst the trillion dollar student loan bubble.
This is the case of Michael Hedlund.
His tale seems unexceptional in today's economic hard times...
Hedlund went to the University of Oregon and earned a bachelor's degree in business administration. He then attended Willamette Law School where he earned his J.D.
Hedlund financed his education with Stafford loans, a commonplace higher education loan backed by the U.S. government.
After graduating, Hedlund took the Oregon bar exam and worked as an intern for the Klamath County District Attorney.
That's when things began to fall apart.
Hedlund failed the bar. He tried and failed again. The DA fired him for he was not able to practice law.
In an effort to turn things around, Hedlund got a full time job as a counselor with the Klamath County Juvenile Department. He signed up to take a third stab at the bar exam.
The day of the exam, he accidentally locked his keys in his car and missed the test.
At this point, Hedlund gave up on trying to practice law. He married in 2000, and became a father in 2001.
But just because Hedlund gave up on his legal training didn't mean the lenders who paid for it were going to let him off the hook.
Hedlund owed PHEAA (Pennsylvania Higher Education Assistance Agency) more than $85,000, which came out to monthly payments around $800. He didn't make nearly enough money in his counselor position to pay that amount, so he began searching for relief.
After exhausting all forbearance opportunities, Hedlund applied to consolidate his student loans in an attempt to lower his monthly payment.
The lender lost his application causing Michael to default on his loans. Once he defaulted, he was no longer eligible for consolidation or any other program relief. He tried different avenues to consolidate his loans but was rejected at every turn. He made every attempt to continue paying for his loans.
But the lenders filed action against Hedlund for defaulting. They began garnishing his wages in small increments, which he did not contest.
But what happened next made Hedlund hit his breaking point...
One of the lenders garnished a larger chunk, way too much for Hedlund to handle, as he frantically tried to keep his family afloat.
In a final act of desperation, Hedlund filed for bankruptcy.
Until Hedlund's case, bankruptcy was thought to be a safety net only available to failed businesses and unlucky or mismanaged personal finances.
Debt wrought from educating yourself is considered a non-dischargeable offense, unless you can show "undue hardship" - up until now a nearly insurmountable standard to prove in court.
Proving undue hardship is a costly and highly intrusive prospect. The burden is on the debtor to prove it's impossible for him or her to pay the student loan. The process involves a public, intimate, and downright embarrassing examination of your finances.
On top of that, different courts use different indicators to determine undue hardship, making the likelihood of success extremely difficult to predict.
But here we have Michael Hedlund, a shining example of a man who acted in good faith to repay his debt.
The Ninth Circuit looked upon Hedlund with an appraising eye.
Here is a debtor who made every effort to obtain employment, to maximize his income, and to minimize his expenses. He tried everything he could think of to reduce the monthly payments to a manageable amount, including negotiating with lenders. He even endured wage garnishments without protest until an overwhelming amount was taken.
Hedlund was judged to have done his absolute best to pay his debts and so the court discharged all but $32,080 of his remaining debt.
It decided that paying the full amount would be too onerous on Hedlund and his family.
This ruling opens the flood gates to student debtors across the nation.
By defining guidelines for undue hardship in a detailed, published opinion, the Ninth Circuit has given courts more freedom to say, "You've done enough to try to repay. We'll discharge your student debts."
Borrowers who have truly made every effort to repay their loans now have an avenue for relief.
Derek Foran, whose firm represented Hedlund, commented, "The Ninth Circuit's decision is important for other student debtors, because it clarifies the correct standard of review governing undue hardship determinations under the bankruptcy code. It will mean significant relief for student debtors - who often are unrepresented - seeking relief in bankruptcy court."
Now, imagine what would happen if an abundance of student debtors across the nation have circumstances as compelling as Hedlund's?
The implications are vast, given the student loan bubble.
Klamath Community College President Dr. Roberto Gutierrez commented to his local NBC affiliate: "An extreme measure would be that the bubble will burst as far as loans - and a lot of students will refuse to pay the loans anymore. Then we've got a problem, because then we may have lenders that do not want to loan anymore."
If the student loan bubble bursts, we are talking earth-shaking stuff here - as major as the subprime mortgage crisis in 2008.
And, just like subprime, Hedlund's case reiterates the idea that lenders have a responsibility to issue loans they know can actually be repaid.
Hedlund's case is a game changer for student debtors, and if enough borrowers like him are out there, it's a game changer for us all.
- Money Morning:
The Scary Reality of the Student Loan Bubble in 5 Charts
- Money Morning:
How Student Loans Became a $120 Billion Government Bonanza
Court opens window of hope for student debtors
Student Loan Excuse Sends Shockwaves
- Zero Hedge:
Student Loan Bubble? Just Discharge It
- United States Courts for the Ninth Circuit:
Michael Eric Hedlund v. The Educational Resources Institute Inc.; and Pennsylvania Higher Education Assistance Agency, 2013 WL 2232325 (C.A.9 (Or.)), 13 Cal. Daily Op. Serv. 5096