In 2005 Congress added a new subsection to the Bankruptcy Code. It expanded the nondischargeability of student loans to include “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.” Generally, this expanded the nondischargeability of student loans to private student loans. However, by limiting the exclusion to “qualified education loans,” Congress left open the possibility of discharging certain private student loans.
The Internal Revenue Code defines “qualified education loan” as “any indebtedness incurred by the taxpayer solely to pay for 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.”
The Internal Revenue Code defines “qualified higher education expenses” to broadly include such things as tuition, fees, room and board, books, supplies, transportation and even the purchase of a computer. However, the qualified expenses are limited to the “cost of attendance” at the school for the student and the expenses must be for attendance at an “eligible education institution,” defined as an institution eligible to participate in a Title IV federal financial assistance program.
These definitions create several openings for the discharge of private student loans in bankruptcy regardless of whether the borrower can prove an undue hardship. For example, if the private student loan was incurred for a purpose other than to pay for education expenses it should be dischargeable. Private student loans incurred to pay off credit card debt or make home improvements as well as educational expenses should be dischargeable because the loan was not made “solely” for the purpose of paying education expenses.
If a student loan borrower is not “an eligible student” the loan should be dischargeable. For example, some for-profit schools aggressively market to people who have not yet graduated from high school or obtained their HeSET (formerly GED) or High School Equivalency Test. These students should be able to discharge loans obtained prior to the time they became eligible. To be an eligible student, the borrower must be enrolled at least half-time and be seeking a degree. Study abroad is only eligible to the extent it is approved for credit by the home college or university.
The expenses must be incurred on behalf of the debtor, the debtor’s spouse or a dependent of the debtor. A grandmother or favorite uncle who co-signed for the student debtor should be able to discharge in bankruptcy any private student loans incurred, unless the student was a dependent.
Private student loans incurred at institutions that are not eligible to participate in federal financial assistance programs should be dischargeable. For example, private student loans to attend many diploma mills or unaccredited schools should be dischargeable.