Recent decisions from courts around the country confirm that some private student loans can be discharged in bankruptcy. The most recent decision from the Second Circuit U.S. Court of Appeals agreed with a New York bankruptcy court’s ruling that two Sallie Mae Tuition Answer Loans could be discharged in the borrower’s bankruptcy because they exceeded the cost to attend college.
The bankruptcy code prohibits three kinds of educational debt from being discharged. First, loans and benefit overpayments made or guaranteed by the government or a nonprofit can’t be discharged. Second, obligations to repay funds received as an educational benefit, scholarship or stipend can’t be discharged. And finally, “qualified private educational loans” can’t be discharged. But private student loans are “qualified” only if they were made to students attending an “eligible” higher educational institution and only if they don’t exceed the college’s cost of attendance. A school’s cost of attendance includes tuition and fees, room and board (or living expenses), books, supplies, transportation, loan fees, and miscellaneous expenses (including a reasonable amount for the cost of a personal computer), allowance for child care or other dependent care, costs related to a disability, and reasonable costs for eligible study-abroad programs.
In the New York case, the debtor had taken out several student loans but two Sallie Mae Tuition Answer loans went straight into his bank account and exceeded the cost of attending the school. Sallie Mae/Navient argued the loans couldn’t be discharged as an “educational benefit” but the courts agreed the bankruptcy code’s use of the word “educational benefit” means something different than the word “loan” so that if a private student loan isn’t a “qualified” private student loan it can be discharged.
The decision from the Second Circuit Court of Appeals joins other recent rulings finding that certain private student loans can be discharged in bankruptcy. But debtors continue to face a high barrier to getting student loans discharged in bankruptcy because of the cost of the litigation. Congress should pass legislation making it easier for borrowers to discharge student loans in bankruptcy just as they can discharge almost every other type of debt.