A medical graduate with over $ 440,000 in student debt recently saw nearly 99% of its loans canceled by a California bankruptcy court, pointing to the growing trend certain dischargeable student loans.
San Diego-based Seth Koeut was born to Cambodian refugees who came to the United States as a child and then went on to study medicine in the hopes of becoming a doctor.
After failing to secure a resident role – a required part of the transition from a medical school graduate to a licensed healthcare professional – Koeut ended up in menial jobs before filing for Chapter bankruptcy 7 in May 2012 while holding $ 440,465.66 in federally backed student debt. (Up to 10,000 medical school graduates in the United States are not matched with residency programs, according to a recent New York Times report.)
In 2015, Koeut filed a adversarial procedure to pay off student loans in the context of bankruptcy. After the rejection of the adversarial procedure, Koeut lodged an appeal in 2018. In October 2020, opposing the delivery of the loans, the Ministry of Education (ED) claimed that he had “not done his best. better to find a better job “.
In December 2020, the US Bankruptcy Court for the Southern District of California ruled in favor of Koeut, granting him a 98.9% discharge of the balance of his debt – leaving him $ 8,291.67 at an interest rate of 0.11%.
The ED has not appealed the decision and the agency is reviewing its handling of these and other cases.
“Our new management team is currently conducting a review of ongoing litigation to understand the positions taken by the agency and identify areas where we may or may not want to take a different stance,” said a spokesperson for ED. at Yahoo Finance. “This includes bankruptcy cases as well as many others. “
‘Koeut deserves a break ‘
Born in a Cambodian refugee camp in Thailand, Koeut arrived in America in the 1980s.
His family “lived in extreme poverty”, the file indicates, “collecting cans from the trash to supplement the family income”. Koeut did well in school and graduated with a BA in Marine Biology and Spanish from Duke University in 2002 before moving to Bangkok to study clinical tropical medicine.
He did not earn an official degree and began working part-time in retail before attending the for-profit Ponce School of Medicine in Puerto Rico, finishing in 2010 and passing all medical board exams. However, over the next five years, Koeut was unable to secure a residency placement.
In the meantime, the loans he took to fund his medical school began to expire. Koeut has selected a income-oriented program (IDR) in October 2010 with a monthly payment of $ 0, according to an ED loan analyst who testified in her case. He’s also returned to retail, including jobs at Bloomingdale’s, Crate & Barrel, Banana Republic, and even as a dishwasher at a Mexican restaurant.
Koeut has repeatedly postponed payments while trying unsuccessfully to secure a place in residence. In 2020, according to court documents, Koeut claimed his total assets were less than $ 5,000.
Mr. Koeut’s lawyers, Ahren Tiller and Brett Bodie, argued in court that Koeut applied for 5,000 jobs after graduating from medical school, tried different fields using his language skills and even worked unpaid jobs at universities and others. organizations to improve her resume while living in her parents’ kitchen to avoid paying rent.
And while ED argued that he had not made enough effort to find a job, the court said: “A medical school graduate who works as a parking attendant and dishwasher cannot to be described as a sloth. “
Generally, in personal bankruptcy cases involving student debt, the judge applies the Brunner test – a three-part test applied to student loan borrowers who have initiated adversarial proceedings to pay off student debt – to determine whether particular student loans have caused a borrower undue hardship.
“It has now become that test almost impossible to take now, … [and] honestly, arbitrarily, you just have to become the gold standard, ”Tiller, who works at the Bankruptcy Law Center in California, told Yahoo Finance when asked about the Brunner test. “No one would doubt that this is undue hardship that our client will never pay.”
The judge agreed that Koeut’s situation met the undue hardship threshold.
“Koeut’s current income and expenses do not allow him to maintain a minimum standard of living, even without making a loan repayment. … [and his] the inability to repay the full balance of his loan will persist over his remaining working life to such an extent that he will only be able to make partial payments without suffering undue hardship, ”the judge wrote in a ruling. “Koeut deserves a break.”
‘The student loan program is truly a house of cards
When student borrowers go to bankruptcy court to seek debt relief, the courts often reject the discharge requests and place the borrower on an IDR plan.
In Koeut’s case, if his job prospects didn’t improve, he would have to pay $ 0 per month and be on the right track to forgiveness after 20 years. However, at the end of the IDR program, borrowers would still be faced with a tax bill. John Brooks, a law professor at Georgetown University Law Center, estimated that Koeut’s tax bill for his loans could reach $ 100,000 if canceled through an IDR program.
“It’s really crooked because the reason the loan is canceled at this point is because the person doesn’t have the financial capacity to pay it,” Brooks told Yahoo Finance. “So to say, well, now we’re also going to slap you with a hundred thousand dollar tax bill – that’s trying to spill blood out of a stone.”
Moreover, the promise of forgiveness after 20 years of on-time repayment has not really come to fruition: Persis Yu of the National Consumer Law Center, using a request for public registers in the ER, found that fewer than 20 IDR participants in total were expected to be pardoned by the end of 2019.
“The shockingly low loan cancellation rates from these borrowers portend the widespread problems affecting millions of low-income borrowers,” Yu said. affirmed in a recent article, “and is emblematic of the failure of the ministry [IDR] programs to provide the assistance that Congress intended for troubled borrowers when it passed enabling legislation for these programs.
Koeut rejected the income-based repayment option presented by ED, according to court documents, “because he correctly believes that a [IDR] will continue to depress their credit rating and hamper their employment opportunities and financial stability. Plus, he wouldn’t be able to make more than minimal payments on his loans anyway.
The court agreed that Koeut “would never earn enough income” to pay off his $ 440,000 debt in full and estimated how much he could in fact pay back based on what he could reasonably earn in the 17 years he had earned. he remained as an active adult: $ 8,291.67. . In addition. he would not have to make the first payment until 2031.
“Even if Koeut ultimately maximizes his potential, his salary will still be insufficient to allow him to make more than minimal payments on his student loans,” the court said. “Since Koeut cannot in good faith pay more than he can ever afford without suffering undue hardship, the student loan balance he cannot pay will be discharged and he will have to pay the remainder.”
Jason Iuliano, an assistant professor of law at Villanova University and bankruptcy expert who co-founded student debt startup Lexria, told Yahoo Finance that the court’s response appears to be “part of a larger trend.” courts recognizing that IDR plans – and the inevitable tax bill – are sometimes “not a viable solution for debtors.”
As a result, as more and more student debt is discharged through personal bankruptcy proceedings, a fundamental part of the US student loan system is called into question.
“The student loan program is really a house of cards,” Richard Fossey, professor at the University of Louisiana at Lafayette, told Yahoo Finance. “And if the bankruptcy courts relaxed the standard and started paying off that debt, the whole house of cards would collapse.… That would be the end of a program. [that] higher education institutions now count.