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When is a Student Debt NOT a Student Loan for Bankruptcy Purposes?

Everyone hears that student loans cannot get discharged in bankruptcy.  That is increasingly no longer the case as courts find that undue hardship is shown in ever expanding categories.  Sometimes, however, the debt that is sought to be discharged is not even a real student loan!

What is Excepted from Discharge?

The bankruptcy code excepts from discharge, absent a showing of undue hardship any debt that arises from


           (i)  an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or          nonprofit institution; or
           (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual (11 U.S.C. §523(a)(8))

So, for instance, if you got a Stafford or Parent Plus loan from Sallie Mae, that’s a student loan.  If you got a loan from a private lender to pay for the cost of attendance at NYU or Rutgers, that’s a student loan.  Pretty clear cut.  But there are other loans people take out or other education related debt that is NOT a student loan for bankruptcy purposes and which CAN be discharged often without requiring an adversary proceeding.

Not every loan for education is a student loan:

Loans are loans – that means that the debtor made a promise to some entity to get money and then to pay that money back.  Student loans, however, have to be “qualified education loans.”   Qualified education loans are loans that are incurred to pay “qualified higher education expenses” as defined in §221 of the Internal Revenue Code (Title 26 of the U.S. Code).  Qualified higher education expenses are “the cost of attendance … at an eligible educational institution…” (26 U.S.C. §221(d)).  An eligible educational institution is defined by the higher education act, 20 U.S.C. §1001 et seq.  The essential definition is that any college, university, trade school or other post-secondary educational institution that is eligible to participate in federal student loan programs.  The Department of Education keeps a list of eligible educational institutions at its website.  If the school you went to is NOT on the list, your loan may not be a student loan for the purposes of bankruptcy.  If the institution is not accredited and eligible for federal student aid, then the loan is not a qualified education loan and is therefore dischargeable in bankruptcy.  You may need to file an adversary proceeding if the lending institution does not acknowledge that the loan is not a qualified education loan.

Unpaid Tuition is NOT a student loan

An obligation to pay tuition is not a student loan.  If you just owed back tuition, absent some form of promissory note or contract to pay over time, there is no student loan.  In re Renshaw, 222 F.3d 82 (2d Cir. 2000)

Loans above the Costs of Attendance are NOT qualified education loans and may be dischargeable.

Sometimes loans are taken out for living expenses that are incurred while going to school.  These are referred to as “Tuition Answer” loans.  Several recent appellate level cases have held that these loans are not excepted from discharge because they were “not obligations to repay funds received as an educational benefit.”  McDaniel v. Navient Sols, 973 F.3d 1083 (10th Cir. 2020); see also Crocker v. Navient Sols., LLC, 941 F.3d 206 (5th Cir. 2019).   These courts have taken a narrow view of what an educational benefit is and because the Answer loans do not fall within the narrow definition of an educational benefit, they are dischargeable.  Similarly, exam loans, like Bar Exam loans may not be considered student loans.  Citibank v. Campbell, 547 B.R. 49 (Bankr. E.D.N.Y. 2016) (holding that a credit based loan from a for-profit bank was not an educational benefit).  There is no appellate level decision on those loans.

Important factors to consider

Student Loans and education loans are a big topic in today’s concerns about debt.  Getting these loans, or loans that may be considered student loans discharged can be complicated and the entities that made these loans have a strongly vested interest in making sure that as few loans as possible are discharged under the Bankruptcy Code.  That being said, many student loan lenders are willing to deal and filing an adversary proceeding to discharge the debt may be a good opening salvo for getting the loan resolved.