Are private student loans dischargeable in bankruptcy court? An In-Depth Review of Each Subsection of Section 523(a)(8) of the Bankruptcy Code – Part III

This is a three-part article that explores whether private student loans are exempt from discharge under Section 523(a)(8) of the Bankruptcy Code. Section 523(a)(8) includes three categories of non-dischargeable student debt. Part I of the blog post discusses Section 523(a)(8)(A)(i) and can be viewed here. Part II of the blog post discusses Section 523(a)(8)(A)(ii) and can be viewed here. This is Part III of the blog post and explores the final category of non-dischargeable student loan debt, Section 523(a)(8)(B).

Section 523(a)(8)(B) — “Qualified Education Loan”

The final non-dischargeable exception states that “any other education 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” is not dischargeable unless the payment of the debt imposes a hardship excessive to the debtor and his dependents. 11 USCS 523 § (a)(8)(B) (emphasis added). Section 523(a)(8) leads the reader through a statutory trail and, therefore, requires a detailed explanation of each section mentioned in the statute.

Section 221(d)(1) of the Internal Revenue Code (“IRC”) states that a “qualifying education loan” is any debt incurred by the taxpayer solely to pay “qualifying higher education expenses “. The term “eligible higher education expenses” in Section 221(d)(1) of the IRC means all expenses used to fund the student’s education, such as tuition, books, supplies, room and board and other related expenses. To see 26 USCS § 221 referring to 20 USCS § 1087ll. Furthermore, “qualified higher education[al] expenses” must be directed to an “eligible educational institution”. To see 26 USCS § 221 referring to 26 USCS § 25A. Whether private, nonprofit, or government-funded, most accredited universities are “qualifying educational institutions.”[i]

Despite the complexity of Section 523(a)(8)(B), bankruptcy courts across the country seem to agree that Section 523(a)(8)(B) encompasses private student loans. For example, in Conti c. Arrowood Indem. Co. (In re Conti), 982 F.3d 445 (6th Cir. 2020), debtor received loans from CitiBank to fund her college education, then later sought to discharge her private debt through Chapter 7 bankruptcy It was undisputed that the proceeds of the loan were intended for the debtor, that the debtor was a qualifying student when she incurred the debt, and that the loan funds were paid to an approved institution. The only issue on appeal was whether the overall purpose of the loan was to finance the debtor’s education. See In re Conti982 F.3d at 446-47.

The Circuit Court held that the purpose of the loan proceeds can be “essentially discerned from the lender’s agreement with the borrower”. ID. at 448-49. The Circuit Court found that the promissory notes explicitly stated that the loan was for educational expenses at the named institution and even stated that the proceeds of the loan were intended to pay the debtor’s tuition fees. ID. Accordingly, the Court of Appeal held that the private student loan was a “qualified education loan” and, therefore, was not dischargeable under Section 523(a)(8)(B). .

The District of Alaska Bankruptcy Court reached a similar conclusion in the case of Rizor v. Acapita Educ. Fin. Corp. (In re Rizor), 553 BR 144 (Bankr. D. Alaska 2016). In this case, the debtor took out a private student loan to fund his attendance at a private, for-profit veterinary school in Grenada. Contrary to In Re Contithe main issue was whether the veterinary school was a qualifying educational institution (“EEI”). In re Rizor553 BR 144. The bankruptcy court ruled that the institution was an IED because Section 1002 of the United States Education Code provided an exclusion for specific overseas veterinary schools. ID.

At first glance, Section 523(a)(8)(B) appears to provide a safe haven for private student loans. However, it is important to note that Section 523(a)(8)(B) is extremely dense and regulated by law. Part III of the article has covered only the most important and relevant parts of this subsection. The cases cited above offer guidance to bankruptcy courts on the inner workings of Section 523(a)(8)(B), but do not eliminate every moving part of this exception. Needless to say, savvy attorneys on both sides of the aisle will continue to uncover other legal issues that will no doubt make this subsection harder to navigate.

Conclusion

This three-part blog post has discussed each category of non-dischargeable student loan debt in Section 523(a)(8) of the Bankruptcy Code. Part I of the blog post, accessible here, focused on Section 523(a)(8)(A)(i) and concluded that the term “funded” takes on many definitions, depending on the type. ready-to-play program. Part II of the blog post can be viewed here and focused on Section 523(a)(8)(A)(ii), which does not provide a haven for private lenders. There seems to be consensus among the circuit courts that Section 523(a)(8)(A)(ii) is not loan-focused at all; instead, the subsection targets unconditional grants, such as stipends and scholarships. Part III of the article was discussed above and examined the complex statutory trail created by Code Section 523(a)(8)(B).

Analyzing the three non-dischargeable exceptions under Section 523(a)(8), it appears that private student loans are non-dischargeable in two instances. Under Section 523(a)(8)(A)(i), a private student loan is exempt from discharge if a nonprofit entity was part of a loan program that facilitates loans to students with need financial assistance, and the non-profit entity has guaranteed the loan or purchased the loan from the original lender. Section 523(a)(8)(B) is also a haven for private lenders. The threshold issue under Section 523(a)(8)(B) is that the private student loan must be a “qualified education loan,” which requires the sponsor to jump through several statutory hurdles.

This is Part III of a three-part blog post. Part I of this three-part blog post can be accessed by clicking this link. Part II of this blog post can be accessed by clicking on this link.