A New Bankruptcy Decision Could Affect Your Private Student Loans

Image from the article titled A New Bankruptcy Ruling Could Affect Your Private Student Loans

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One of the biggest disadvantages of private student loans is that there is less protection for borrowers. Federal student loans, for example, offer more plans for repayment, deferral or forbearance, subsidized interest, and loan cancellation.

Unfortunately, both types of student loans can be difficult to pay off in bankruptcy, due to the need to prove “undue hardship” in court, which can be too costly for most borrowers. But a recent bankruptcy ruling could change that.

This week, a Colorado couple repaid $ 200,000 in private student loans in a bankruptcy case in the United States Court of Appeals for the Tenth Circuit. The appeals court said the couple’s loans, which were issued by loan giant Navient, did not meet the Tax Code’s definition of “qualified student loans.”

The reason was that the cost was not based on an “educational benefit” and did not cover the “cost of attendance” at their school. Therefore, the couple’s loans were not exempt from discharge in bankruptcy.

As The Wall Street Journal reports, the move could have implications for the millions of Americans struggling with student loans amid the coronavirus pandemic and recession. While it can still be difficult to release private student loans in bankruptcy, experts say it may allow other borrowers to seek private relief. It can also affect how the courts decide which loans can be canceled.

For now, the move can only set a precedent for the Tenth Circuit, which includes Colorado, New Mexico, Oklahoma, Utah and Wyoming. And some experts suggest this may only impact loans that exceed the cost of tuition, rather than all private student loans, but it could have a bigger impact in the future.

Adam S. Minsky, a student loan lawyer and lead contributor to Forbes, notes the potential of the move in a recent article:

Nevertheless, the decision is an important one and reminds that the pursuit of a release from student debt is not a lost cause, despite the many obstacles.

In the meantime, if you are facing bankruptcy due to unpaid student loans, it may be worthwhile to consult a legal expert. They might be able to advise on the likelihood of a private student loan discharge based on this decision and others in the future.