Diane Ashline, a 47-year old single mother, worked for 20 years as a dental assistant. Hoping to increase her income, she took out student loans to get an undergraduate degree and a master’s degree from Kaplan University, a for-profit school. Unfortunately, these degrees did not help her financially.
Ashline never defaulted on her student loans. Instead, she put them in forbearance during the times she was unable to make payments. Nevertheless, by the time she filed for bankruptcy in 2016, she had accumulated $230,000 in student debt.
The U.S. Department of Education DOE) insisted that Ashline be put in an income-based repayment plan (IBR), which would only require her to pay $65 a month. But Judge Thad Collins, who presided over Ashline’s bankruptcy proceedings, rebuffed DOE’s arguments and discharged all of Ashline’s federal student debt.
The judge pointed out that “no evidence [had been] produced to suggest that [Ashline] would ever be able to leverage her unused master’s degree to obtain a higher paying job in the future.” In fact, he ruled, there was “no suggestion that her income would increase in any meaningful way over the remainder of her working life.”
Judge Collins emphatically rejected DOE’s demand that Ms. Ashline sign up for an IBR, partly due to her age. At the time Judge Collins issued his decision last December, Ashline was 50 years old. “Upon completion of a hypothetical IBRplan,” the judge observed, “she would be between 69 and 74 years old.”
Under an IBR, the judge explained, interest on Ashline’s student loans would outpace her payments, and she would never pay off her debt. Although the unpaid debt would be forgiven if she completed her IBR, the forgiven debt would be taxable to her. Ashline would then face a “student loan forgiveness tax bomb”–a tax bill for the entire amount of the forgiven debt.
Judge Collins summarized his ruling in favor of Ms. Collins with these words:
[T]he Court finds that [Ashline] has proven, by a preponderance of the evidence, that not discharging her student loans would impose an undue hardship on her and her dependents. She has maximized her earnings potential. Her future financial condition is not likely to improve to any significant degree. . . . Her expenses are not extravagant. Debtor has made the good faith effort to make payments on her student loans . . . and has deferred those payments when she was unable to make them.
Judge Collins’s decision joins a growing body of case law that rejects the argument that student debtors should sign up for IBRs instead of seeking bankruptcy relief. Indeed, Judge Collins himself has issued two other important decisions in which he discharged student debt.
Gradually, I believe the tide is turning in favor of distressed student-loan debtors in the bankruptcy courts. Increasingly, federal bankruptcy judges are recognizing that forcing college borrowers into IBRs makes no sense.
I hope the Ashline decision and other bankruptcy court decisions in a similar vein will encourage “honest but unfortunate” student-loan debtors to shed their unpayable student loans in a federal bankruptcy court.
Ashline v. U.S. Department of Education, Adversary No. 16-09028 (Bankr. N.D. Iowa, Sept. 28, 2021).
Elizabeth Lally, N.D. of Iowa Judge Collins Leads the Way On Discharge of Student Debt in the Eighth Circuit, Goosmann Law Firm (July 28, 2018).
In re Martin, 16-9052 (Bankr. N.D. Iowa Feb. 16, 2018).
Fern v. FedLoan Servicing, 553 B.R. 362 (Bankr. N.D. Iowa 2016), aff’d 563 B.R. 1 (8th Cir. BAP 2017).