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First Circuit Could Make Landmark Student Loan Decision

Sharon Edmondson, Washington Legislative Team Member | October 29, 2015

A case set to be argued Nov. 5 before the First Circuit could provide some relief to the growing ranks of student debtors (Murphy v. US Department of Education, 1st Cir., No. 14-01691, oral argument 11/5/15).

The First Circuit is expected to weigh in on how destitute a debtor must be in order to discharge student loans in bankruptcy. Student advocates claim that courts have set the bar too high, while lenders and the federal government argue that discharge should only be granted in extraordinary circumstances. While Congress undoubtedly meant for student loans to be more difficult to discharge than other kinds of consumer debt, the standard used by most circuits is extremely difficult for most debtors to satisfy. The steep increase in student debt in recent years has become a major concern for the broader economy, especially because taxpayers are on the hook when students default on federally guaranteed loans.

Federal Reserve Bank of New York
Nine circuits currently use the same strict test to discharge student loans, while the Eighth Circuit stands alone with a slightly different approach. If the First Circuit were to adopt its own unique approach, creating a three-way split, the issue might become even more appealing to the Supreme Court. A similar case out of the Seventh Circuit, Tetzlaff v. Educ. Credit Mgmt. Corp., U.S., No. 15-00485, petition filed 10/15/15, is currently on appeal to the high court, but the court has yet to decide whether or not to hear the case.

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