[Jeon Daegyu's 7 Trials and 8 Failures] Student Loans, Youth Are in Pain

Jeon Dae-gyu, Chief Judge of Seoul Bankruptcy Court

On March 16, the Bank of Korea abruptly lowered the base interest rate to 0.75%. This was a so-called big cut, a significant rate reduction. It reflects the poor economic conditions caused by the novel coronavirus disease (COVID-19) crisis. As a result, economic indicators such as inflation, growth rate, and interest rates have all converged to zero, ushering in an era of the "zero economy." The direct economic shock from COVID-19 has not spared university students either. Employment for young people graduating from college is challenging. What tightens the noose even more is student loans. According to statistics, nearly 10,000 young people have become credit delinquents due to failure to repay student loans, and 17,000 are unable to repay their student loans even after employment.

Student loans are loans provided to university students for tuition, with principal and interest repayments scheduled after income is generated, i.e., after employment, based on income level. Regardless of current economic conditions, this system was introduced to increase access to higher education, guarantee equal opportunities for individuals, and socially foster talented human resources. Despite this purpose, student loans have become a significant burden for university graduates. Not only has the total amount of student loan debt reached a considerable level, but the quality of student loans continues to deteriorate. The number of graduates delinquent on principal and interest payments is steadily increasing. The recent decline in new hires due to the COVID-19 crisis has exacerbated this phenomenon.

The government, local governments, and even the Credit Recovery Committee have introduced various measures to address delinquent student loan issues, such as lowering interest rates or extending repayment periods. However, these measures lack legal binding force and cannot be effective if no agreement is reached between parties or disputes arise. Therefore, attention can be given to personal bankruptcy and rehabilitation procedures conducted by the courts. Court procedures are positive in that they are legal processes that affect all creditors, including those opposing debt adjustment. However, they still do not provide sufficient relief.

In personal bankruptcy procedures, student loans are not discharged. The non-dischargeability of student loans stems from their unique nature. To ensure that many citizens continuously benefit from the student loan system, the funding for student loans must be maintained. The funding for student loans has a public good nature, as it must be continuously used for many citizens to receive higher education. Recovering student loan funds to maintain resources is crucial to securing the sustainability of the student loan system, which is why discharge is not recognized. In personal rehabilitation procedures, student loans can be discharged, but to receive discharge, the debtor must, in principle, use all disposable income (income minus living expenses) for repayment over three years. For young people who have just graduated from university, three years is not a short period, and requiring them to devote all disposable income to repayment has limitations as it negatively affects marriage and childbirth.

In the United States, student loan debts are not discharged in either personal bankruptcy or rehabilitation procedures. However, exceptions are made if the debtor and their family face undue hardship. This is called the "Brunner Test," which requires: ① that forcing repayment of the student loan would prevent the debtor from maintaining a minimal standard of living based on current income and expenses; ② additional circumstances indicate that this situation is likely to persist for a significant portion of the repayment period; and ③ the debtor has made a good faith effort to repay the student loan. If these conditions are met, discharge is allowed.

In Korea, there is a special discharge system in personal rehabilitation procedures that allows discharge in cases of repayment difficulty, so courts need to actively recognize discharge of student loan debts as well. In personal bankruptcy procedures, policy consideration through legal amendments allowing discharge of student loan debts in certain cases, referencing U.S. practical operations, is necessary. Young people are an important human asset for the future. As Professor Kim Nando said, is youth painful because it is youth, or is it youth because it is painful? Either way, the pain of youth must be healed.