Some Courts Are Treating Certain Student Loans As Dischargeable
Although the common thinking is that student loans are not dischargeable in bankruptcy, some courts are starting to see things differently—at least when it comes to private student loans. The change stems from the technical definition of what is and what is not a student loan.
Federal and Private Loans
There is no ability, absent a showing of extreme and undue hardship, to discharge a student loan. There are separate sections of the bankruptcy code for federal student loans and loans made by private companies.
As the name implies, a federal loan is one that comes from the government. There is little doubt that those loans are not dischargeable in most cases.
But private loans are like any other loan from a bank or a credit card company. They have a separate part of the bankruptcy code that addresses their ability to be discharged. The section making private loans nondischargeable says that only what are known as “qualified educational loans” are not dischargeable. That term has generally been defined as loans that are solely or only for higher education expenses.
This makes a difference. In many cases, we call loans “student loans,” but they are not being made towards the education itself. They may be paid out to cover housing, living expenses, or even “exam expenses,” which are loans designed to pay living expenses while students study for professional exams, like the medical exam or bar exam in law.
Unlike traditional student loans, which are paid out to the school, these kinds of loans often are paid directly to the student.
Educational Loans or Not?
In one case out of the Second Federal Circuit, student loan servicer Navient tried to argue that their loans were covered and protected from being discharged by the more expensive, more protective part of the bankruptcy code that addressed federal loans.
But the court disagreed, saying a private loan is only covered under the part of the law that covers “qualified educational loans,” and this particular loan, being paid directly to the student and not to the school, did not qualify. As such, the loan, according to the court, was dischargeable.
Dual Purpose Loans
Many loans are for dual purposes—for education or tuition, as well as for housing or living expenses.
Courts will continue to struggle with how to handle a loan that has dual purposes. It may be that some student loans will be dischargeable, which is better than what we have now, where courts are always hesitant to discharge any student loan at all.
This is just one case, and it is not a case that a Florida court, not being in the second district, has to follow. Still, for those with private loans, it provides some hope, and an argument that can be made to get some bankruptcy relief. This is especially true where, like with most students, some part of the student loan went to pay expenses other than education-related costs.