Note that the Debtor’s obligations under the debt is dischargeable under Section 523(a)(8) only if the Creditor proves that that section applies. The term “student loans” is itself an issue! (This letter is for information only; no person should rely thereon without the advise of an attorney as the laws and interpretations of it and case law constantly changes). When trying to determine on discharging “student loan” debts, this is what you need to understand. ( A recent article was also recently published if you want to read : https://www.consumerfinance.gov/about-us/blog/busting-myths-about-bankruptcy-and-private-student-loans/?fbclid=IwAR0qbuRPjc7oWWQybXE-0JKO8wtUJjljPlCUGmJQHHC9hfWiaGvBAeuiihs)
1. “Student Loan”: Threshold issue is whether exception applies to facts of your case:
Thus, the following elements must be proven by a creditor: Liability must be for one of the following three types:
11 U.S.C. 523(a)(8)(A)(I):
educational benefit overpayment or loan made by a governmental unit; or
educational benefit overpayment or loan insured by a governmental unit; or
educational benefit overpayment or loan guaranteed by a governmental unit; or
educational benefit overpayment or loan made under any program funded in whole or in part by either:
a governmental unit or
nonprofit institution; or
11 U.S.C. 523(a)(8)(A)(ii):
an obligation to repay funds received as an educational benefit, scholarship or stipend; or
11 U.S.C. 523(a)(8)(B):
Any other educational loan that is 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;
Most private student loans must therefore fall within subsection (8)(A)(ii) or (8)(B) above.
2. Burden of Proof on Creditor to Establish One of the Above Elements
One of the above elements must be present before the remainder of the statute applies as if no element is present, then the debt will be discharged unless it falls within another exception such as fraud, etc.
3. Analysis: In light of the above, the first analysis is to determine which of the provisions your loan falls within. If the loan does fall within one of the above elements, then the “Undue Hardship” analysis is the only way to discharge such debts or by agreement or settlement. See my separate page on whether "Discharge Student Loans ".
So , the above subsections have been litigated many times and changing over time despite the same statutory language since that law was enacted many years ago. This is a mind-numbing analysis requiring specific complicated analysis. Why?
In light of the above, the first analysis is to determine which of the provisions the “loan” falls within. If the loan does fall within one of the above elements, then the remaining “Undue Hardship” analysis is the only way to discharge such debts.
Before analyzing though the definition, determine if your creditor is Navient and possibly part of a pending settlement?
Navient, which spun off from student loan company Sallie Mae
in 2014, agreed to cancel loans for about 66,000 borrowers who took out Sallie Mae loans from 2002 to 2010 and defaulted. Navient says it will notify borrowers who qualify for loan cancellation under the settlement once the court approves the agreement. Read more at the following:
3.Sensational Recent Crucial Law Interpretation of Private Student Loans.
For many years it was commonly believe that private loans
fell within section 1e above. Now, 3 separate United States Appellate Courts have interpreted Type 2 to exclude private loans for the most part and thus a private lender must establish they are covered by Type 3 loans! Thus, the 5th Circuit Court of Appeals in In Re Crocker No. 18-20254 dated 10-21-19, the 10th Circuit Court of Appeals in In Re McDaniel No. 18.1445 dated 8-31-20, and the 2nd Circuit in In Re Homaidan, No. 20-1981-bk dated 7-15-21, are the only 3 known Appellate Court decisions to interpret that area of the law: All three rules in favor of debtors and against Creditors.
Why so MIND-NUMBING complicated? The words “..received as an educational benefit” is significant language analyzed. All three cases ruled such language does “not support inclusion of private student loans”.(Crocker at page 24, McDaniel fn 11 at page 24, and McDaniel at page 30).
If you are a debtor or private bankruptcy attorney helping a
debtor with such loans you must understand these complex laws to successfully establish discharge of such loans or reaching a favorable settlement. A favorable settlement in fact may be obtaining an agreement on even non-dischargeable private student loan helping a debtor pay a substantial lower monthly payment, smaller interest rate, and discharging some of the debt. The threat of attempting to prove “Undue Hardship” can be used for “ammunition” in such arguments also.
If Private Student Creditor cannot establish Type 2 above they must establish then Type 3 applies. Type 3 analysis is very complicated as set forth somewhat below and establishes why such cases are very complex. A lawsuit on this section was set for a trial before Honorable Judge Lynch in Tacoma In Re Franklin 20-04047-BDL but was resolved very favorably to the debtor prior to trial (such arguments can lead to favorable settlements if an attorney understands and argues the failure of creditors to establish all elements).
4. Type 3 Complex Sub-elements Creditor Must Establish to Prove a Loan is “Student Loan” within Section 523(a)(8)
Simple Threshhold Issue First: see if the creditor falls within the title VI “eligible educational institution” described herein. Why? Because Creditor cannot prove they fall within the definition of “student loan” if they are not that type of institution and thus no further agonizing review is needed!
If they are not a Title IV school great. If they are, then don’t give up and read all that must be proven carefully set forth below.
Step 1: Creditor must prove the loan is a “qualified education loan” as defined in Internal Revenue Code Section 221(d). That term is defined as follows:
(1)Qualified education loan
The term “qualified education loan” means any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses—
(A)which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,
(B)which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and
(C)which are attributable to education furnished during a period during which the recipient was an eligible student.
Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. The term “qualified education loan” shall not include any indebtedness owed to a person who is related (within the meaning of section 267(b) or 707(b)(1)) to the taxpayer or to any person by reason of a loan under any qualified employer plan (as defined in section 72(p)(4)) or under any contract referred to in section 72(p)(5).
Step 2: The key term in the definition in Step 1 above is defined as follows: (2)Qualified higher education expenses:
The term “qualified higher education expenses” means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997) at an eligible educational institution , reduced by the sum of—[certain sums} IRC 221(d)(2).
Step 3: Thus, a non-dischargeable “qualified education loan” must be used solely to pay “qualified higher education expenses” defined as the “cost of attendance” at an “eligible educational institution”.All these terms are defined by statute.
A. “cost of attendance” is defined and lengthy:
For the purpose of this subchapter, the term “cost of attendance” means—
(1)tuition and fees normally assessed a student carrying the same academic workload as determined by the institution, and including costs for rental or purchase of any equipment, materials, or supplies required of all students in the same course of study;
(2)an allowance for books, supplies, transportation, and miscellaneous personal expenses, including a reasonable allowance for the documented rental or purchase of a personal computer, for a student attending the institution on at least a half-time basis, as determined by the institution;
(3)an allowance (as determined by the institution) for room and board costs incurred by the student which—
(A)shall be an allowance determined by the institution for a student without dependents residing at home with parents;
(B)for students without dependents residing in institutionally owned or operated housing, shall be a standard allowance determined by the institution based on the amount normally assessed most of its residents for room and board;
(C)for students who live in housing located on a military base or for which a basic allowance is provided under section 403(b) of title 37, shall be an allowance based on the expenses reasonably incurred by such students for board but not for room; and
(D)for all other students shall be an allowance based on the expenses reasonably incurred by such students for room and board;
(4)for less than half-time students (as determined by the institution), tuition and fees and an allowance for only—
(A)books, supplies, and transportation (as determined by the institution);
(B)dependent care expenses (determined in accordance with paragraph (8)); and
(C)room and board costs (determined in accordance with paragraph
(3)), except that a student may receive an allowance for such costs under this subparagraph for not more than 3 semesters or the equivalent, of which not more than 2 semesters or the equivalent may be consecutive;
(5)for a student engaged in a program of study by correspondence, only tuition and fees and, if required, books and supplies, travel, and room and board costs incurred specifically in fulfilling a required period of residential training;
(6)for incarcerated students only tuition and fees and, if required, books and supplies;
(7)for a student enrolled in an academic program in a program of study abroad approved for credit by the student’s home institution, reasonable costs associated with such study (as determined by the institution at which such student is enrolled);
(8)for a student with one or more dependents, an allowance based on the estimated actual expenses incurred for such dependent care, based on the number and age of such dependents, except that—
(A)such allowance shall not exceed the reasonable cost in the community in which such student resides for the kind of care provided; and
(B)the period for which dependent care is required includes, but is not limited to, class-time, study-time, field work, internships, and commuting time;
(9)for a student with a disability, an allowance (as determined by the institution) for those expenses related to the student’s disability, including special services, personal assistance, transportation, equipment, and supplies that are reasonably incurred and not provided for by other assisting agencies;
(10)for a student receiving all or part of the student’s instruction by means of telecommunications technology, no distinction shall be made with respect to the mode of instruction in determining costs;
(11)for a student engaged in a work experience under a cooperative education program, an allowance for reasonable costs associated with such employment (as determined by the institution);
(12)for a student who receives a loan under this or any other Federal law, or, at the option of the institution, a conventional student loan incurred by the student to cover a student’s cost of attendance at the institution, an allowance for the actual cost of any loan fee, origination fee, or insurance premium charged to such student or such parent on such loan, or the average cost of any such fee or premium charged by the Secretary, lender, or guaranty agency making or insuring such loan, as the case may be; and
(13)at the option of the institution, for a student in a program requiring professional licensure or certification, the one-time cost of obtaining the first professional credentials (as determined by the institution).
B. “Eligible educational institution “ is defined at IRC 25A(f)(2). That term has the same meaning given such term by section 25A(f)(2), except that such term shall also include an institution conducting an internship or residency program leading to a degree or certificate awarded by an institution of higher education, a hospital, or a health care facility which offers postgraduate training.
25A(f)(2) is defined also as: The term "eligible educational institution" means an institution-
(A) which is described in section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088), as in effect on the date of the enactment of this section , and (B) which is eligible to participate in a program under title IV of such Act.
5. Conclusion to Successful Understanding Analysis.
When must the issue of establishing the debt is or is not discharged? When must the analysis occur? Anytime is possible but risks on each side. The creditor can risk violating the discharge order if after discharge they pursue seeking payment because such action violates the discharge provisions.
The debtor can pursue the adversary action during the underlying bankruptcy or later. Richard Granvold re-opened a case 5 years old in fact to successfully settle a case in which the debtor’s prior attorney advised her that “student loan debts” were never discharged; thus, even an older case can be re-opened if needed.
Advantages may exist in waiting in case Congress adopts changes to Section 523(a)(8) also as the law in effect as of the petition date governs.
The creditor has the duty to establish all the above elements for private student loans under Type 2 or 3. Even if all elements are established, then the debtor can still prevail on establishing undue hardship. However, if the creditor later pursues the debt post bankruptcy and no adversary case was filed, the debtor may ask for proof of each of the above elements or see a bankruptcy attorney specializing in such possible violations.