In 1991, Troy Speer saw a television advertisement for Texas Aero Tech that promised him an education and a future. Troy received assurances from both the advertisement and the personnel of Texas Aero Tech that the school assists students in job placement after their completion of the program. As a result, he enrolled in a year-long program for auto mechanics and repair, borrowing $13,230 in educational loans from Educational Credit Management Corporation (“ECMC”) to pay for the program.
Troy completed the program, but failed the first part of a multipart exam that the Federal Aviation Association requires. He learned that only three or four out of the fifty graduates from his class had passed the exam and secured employment. Disheartened and discouraged, Troy did not attempt to retake the exam. Instead, he wrote a letter to his legislative representative expressing his concern over the school’s misrepresentations to him about job placement. The letter was never investigated.
Troy had a great amount of difficulty repaying his loans. At first, he was unemployed and filed for deferment on them. He did not have the necessary qualifications to gain work as a skilled laborer, and as a result, he worked odd jobs before securing full-time employment as a carpenter for a construction company. His salary, however, was too low to allow him to make any payments toward the loan, and he filed for forbearance shortly thereafter.
By 1999, ECMC began to garnish ten percent of Troy’s wages. His already strapped budget broke, causing him to file for bankruptcy. Even worse, the garnishment of Troy’s wages failed to decrease his loan debt. Instead, his debt continued to grow because the garnished wages, $145 per month, were insufficient to pay the interest on the loan, let alone the principal. By May 21, 2001, Troy’s $13,000 in loans had grown to over $24,000.
The Bankruptcy Court for the Western District of Texas presided over Troy’s bankruptcy case. In reviewing his financial situation, it determined that Troy’s stepfather was able to sum up Troy’s situation best:
[Troy] has no social life. He is in constant turmoil over how to pay for unexpected expenses. He has had back surgery. His living quarters are substandard. He has not seen his child in over 3 years. He needs several teeth pulled. He has very few clothes. He is in a constant state of financial purgatory and sees no way out. His only outlets for entertainment are his cable television and his dog.
Furthermore, the court noted that the education Troy received did not benefit him and left him with no ability to repay the loans.
In defending its recovery of the loan, ECMC suggested ways in which Troy might be able to repay it. First, ECMC offered Troy two potential repayment options. Both options would last for twenty years, and with interest, the amount of repayment would exceed $50,000 on $13,000 in loans. Second, ECMC suggested that Troy should get a part-time job on top of his forty-hour work week performing hard labor. Additionally, ECMC also suggested that he remove his cable television, one of his two outlets for entertainment (the other being his dog).
Should Troy have to repay his loans? He is clearly in a desperate situation; he has not benefited from an education that cost $13,000, and he may now have to pay well over $50,000. Troy’s loans were discharged, particularly because the court found that Troy did not receive any benefit from his education and will never be employed in the field that he had studied at Texas Aero Tech. Many jurisdictions, however, would not have considered whether Troy benefited from his education in
determining whether the court should discharge his loan, potentially leaving him struggling in a life sentence of debt.
Over the past few years, stories like Troy’s have cropped up in the news with more and more frequency. Primarily, prospective students have difficulty in accessing the information they need to make an informed decision as to whether to attend a for-profit trade school. The current federal requirements have allowed for-profit trade schools to shade the truth, or worse, to outright lie as to their true job placement statistics, yet the schools stay within the confines of the law. As a result, students respond to admissions staffs’ ploys but very rarely are able to recover any damages for the misrepresentations on which they rely.
Moreover, students have extreme difficulty in persuading a court to discharge their educational loans in a bankruptcy proceeding, particularly due to the requirement that a student has suffered an “undue hardship” to qualify for an educational loan discharge. In interpreting what constitutes an undue hardship, the majority of the circuits have adopted the test established by the Southern District of New York in Brunner v. New York State Higher Education Services Corp. (In re Brunner). The Brunner test is strict, and in establishing the standard, the court found that it should not review the value of the education that the student received in determining whether the student suffered an undue hardship. Alternatively, the Ninth Circuit has determined that courts should consider educational value in determining whether the student suffered an undue hardship and the court should thus discharge the student’s loan. This Comment suggests that the federal circuit courts following Brunner should reexamine the definition of undue hardship and adopt the Ninth Circuit’s approach, allowing courts to consider the educational value that the student received when determining the student’s future ability to repay the loan, particularly in relation to for-profit trade schools.
Part II.A will discuss the background of for-profit trade schools, including the educational objectives, costs, and marketing techniques, as well as the lack of remedies available to students to hold a for-profit trade school liable for its recruiter’s misrepresentations. In Parts II.B.1 and II.B.2, respectively, the text and legislative intent of the educational loan discharge exception and the general bankruptcy policy in connection with the educational loan discharge exception will be discussed. Part II.B.3 discusses three tests that courts have developed in applying the educational loan discharge exception, with the Brunner test emerging as the dominant test. Part III.A explains why the Second Circuit and Seventh Circuit’s approach of not considering educational value in deciding whether to discharge a loan is too harsh in the context of for-profit trade schools. Finally, Part III.B proposes the solution to this problem: adopting the Ninth Circuit’s multivariable approach that considers the educational value a student received when determining whether the student suffered an undue hardship and whether the court should discharge the student’s loan.