Student loan case retried

Declaring bankruptcy is not enough to excuse former students from paying back their student loans.

But one former student circumvented that law in a ruling from the Ninth Circuit Court of Appeals.

Now the Supreme Court is taking a look at the case. The loan company appealed the decision because it says the student, Francisco Espinosa, didn’t follow the proper procedures for dismissing his loan.

The case, United Student Aid Funds Inc. v. Espinosa, questions the status quo of bankruptcy law, which does not allow people who declare bankruptcy to discharge their student loans unless they prove that the debt causes them an “undue hardship.”

According to a Supreme Court report, Espinosa discharged his student loan debts in his bankruptcy plan but never proved undue hardship in a special proceeding.

Espinosa received four student loans totaling more than $13,000 between 1988 and 1989 to attend an Arizona trade school.

The student loan industry could face problems if the Supreme Court upholds the lower courts’ decision, said Shirley Ort, associate provost and director of the Office of Scholarships and Student Aid at UNC.

An affirmative decision could make it easier for debtors to have their student loans excused when they declare bankruptcy. But it is unlikely that the case will generate a major change, Ort said.

“It could cost guarantors some money,” she said.

Approximately 27 percent of UNC undergraduates have some type of federal loans.

According to a College Board annual report for 2008, roughly 49 percent of undergraduate student aid is in the form of loans.

Elizabeth Gibson, a law professor at UNC who specializes in bankruptcy law, said that if the Supreme Court also rules in Espinosa’s favor, it would force lenders to more closely examine their repayment plans and policies and put more safeguards in place.

But it’s likely the decision will be reversed, she said, reaffirming the status quo in bankruptcy law.

“It will make the law more uniform,” Gibson said.

Charles Wirken, attorney for the student loan organization in the case, said that the Court of Appeals’ decision was contrary to U.S. Congress’ intent for bankruptcy law.

“Mr. Espinosa tried to sneak a discharge. He wasn’t playing by the rules,” Wirken said.

If student loan debtors don’t follow the rules, it places additional burdens on the lenders because they don’t get their money back, and on taxpayers to make up the difference, Wirken said.

Espinosa’s attorney could not be reached.



Contact the State & National Editor at stntdesk@unc.edu.