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. This is Part II of the blog post and discusses Section 523(a)(8)(A)(ii). Part III of the blog post explores the final category of non-dischargeable student debt, Section 523(a)(8)(B) and can be viewed here.
Section 523(a)(8)(A)(ii)—What is an “educational benefit”?
The text of Section 523(a)(8)(A)(ii) (hereinafter “(A)(ii)”) states that an “obligation to repay funds received as an educational benefit, grant or allowance” is not dischargeable unless repayment of the debt would impose undue hardship on the debtor and his dependents.
When determining whether private student loans fall under (A)(ii), bankruptcy courts face two problems. The bankruptcy court must first determine whether the debtor actually received funds from the private lender for educational purposes. The second part of the analysis requires determining whether private student loan debt is an “educational benefit, scholarship, or stipend.” 11 USCS § 528(a)(8). Almost all private lenders and loan servicers attempt to categorize private student loans under the term “educational benefit” and avoid arguing that a private student loan is a scholarship or stipend. The main reason is that the terms “grant” and “scholarship” “mean to give, not to borrow” and generally do not need to be repaid by the debtor, whereas a loan must be repaid. McDaniel v. Navient Sols. LLC (In re McDaniel), 973 F.3d 1083, 1094 (10th Cir. 2020). On the other hand, the term “educational benefit” is much broader and leaves room for the argument that private student loans confer an educational benefit on the debtor. See Crocker v. Navient Sols., LLC (In re Crocker)941 F.3d 206, 219 (5th Cir. 2019) (“[t]The key phrase “educational benefit” is the broadest). Accordingly, the second prong relies on the bankruptcy court’s interpretation of “educational benefit.”
The first element – whether the debtor actually received funds – was considered in two cases from the Ninth Circuit. In the case of In re Kashikarthe bankruptcy court held that the term “funds received” means “cash advanced to or on behalf of the debtor”. Kashikar v. Turnstile Capital Mgmt., LLC (In re Kashikar),567 BR 160, 166 (Bankr.9th Cir. 2017) (citations omitted). The bankruptcy court found that the debtor “received the funds” when the private lender disbursed the loan proceeds directly to the institution because the funds were intended to pay for the student’s education. ID at 166-67.
In comparison, a debtor makes do not receive funds when the educational institution grants the debtor a tuition credit in which the institution agrees to be paid at a later date. In Inst. of Imaginal Studies v. Christoff (In re Christoff)527 BR 624 (BAP 9th Cir. 2015), the institution offered the debtor $6,000 in financial assistance in the form of a tuition credit. ID. at 625-26. The debtor was required to repay the loan at the end of her studies. ID. The Ninth Circuit Bankruptcy Appeals Board found that the institution agreed to reduce the student’s tuition by $6,000 for a limited time and agreed to be paid the credit at a later date . ID. at 633-35. No money was advanced to or on behalf of the debtor, and no funds were exchanged between the student, the institution or any lender. ID. Consequently, the Bankruptcy Appeals Board canceled the student loan debt because the Court found that the debtor had not “actually received funds”. In summary, in order to satisfy the first part of analysis (A)(ii), the lender must direct the proceeds of the loan to the debtor or the educational institution.
Before discussing the case law on the second question, it is important to provide some background information. Navient Solutions, LLC (“Navient”) is a national student loan servicing company and is the adverse creditor in the events described below. In each case, Navient argued that the term “educational benefit” was broad enough to encompass private student loans. The Court of Appeals for the Second, Fifth, Ninth, and Tenth Circuits (the “Circuit Courts”) disagreed and found that private student loans do not amount to an “educational benefit” and, by therefore, are not excluded. discharge under (A)(ii).
Each Circuit Court began its analysis by examining the statutory text of Section 523(a)(8). The circuit courts noted that the term “loan” was included in Section 523(A)(i) and (8)(B) – the other two exceptions in Section 523(a)(8) – but was omitted from Section 523 (8)(A)(ii). The Fifth Circuit, in In re Crockerobserved that “Congress has sandwiched subsection (A)(ii), which does not mention loans at least by name, between two subsections that do so explicitly”, indicating that “the educational benefits are not loans”. In re Crocker941 F.3d to 219. The second circuit of Homaidan vs. Sallie Mae, Inc. US Application 2021. LEXIS 20934, at *10 (2d Cir. July 15, 2021, No. 20-1981) came to a similar conclusion and found that the “term” loan is used multiple times in Section 523(8) (A) but is absent from § 523(a)(8)(A)(ii), noting that the omission was intentional. The Circuit Courts ruled that the omission of the word “loan” from (A)(ii) suggested that Congress intended to create a class of student debt that was not incurred through private or federal loans .
The circuit courts’ analysis continued and they defined the term “educational benefit” as used in (A)(ii). Because the term has not been defined by Congress, circuit courts have applied the statutory canon of noscitur a sociss. The canon helps bankruptcy courts define a vague word included in a list by looking at the other terms surrounding the disputed word. See HomaidanU.S. Application 2021. LEXIS 20934 at *13 (“the meaning of questionable terms or phrases may be determined by reference to their relationship to other related words or phrases”) citing United States v. Dauray, 215 F.3d 257 (2nd Cir. 2000) see also In re Crocker941 F.3d 206, 218-219 (“noscitur a sociis. . . . teaches us that statutory words are often known to the company they hold”).
To repeat, the text of (A)(ii) is: “obligation to repay funds received as an educational benefit, scholarship or allowance”. 11 USCS § 523(8)(A)(ii). The Fifth Circuit concluded that when a student receives a stipend or scholarship, he is not required to reimburse the entity that granted him the stipend or scholarship. As the Tenth Circuit succinctly puts it, an “allowance. . . .is a fixed and regular payment, such as a salary and a scholarship. . . .is a financial aid grant to a student”, and both do not normally need to be repaid. In re McDaniel973 F.3d at 1097. Similarly, the word “benefit”, as used in “educational benefit”, implies a payment, gift or service, which need not be repaid. ID.
The interpretation of “benefits”, “scholarships” and “benefits” by the circuit courts indicates that (A)(ii) has been narrowly tailored except for “conditional grants” which must be repaid if certain service obligations are not met. . See In re McDaniel, 973 F.3d at 1102 (the common quality linking the elements of the statutory phrase “educational benefit, scholarship or allowance” is that they can all of course be interpreted as describing “contingent payments”) (citations omitted). The circuit courts have further noted that the main distinction between loans and conditional payments is that loans, whether private or federally backed, must be repaid on a specific date by the debtor. In re Crocker, 941 F.3d at 219-221. By comparison, conditional grants only need to be repaid if the debtor fails to meet their responsibilities under the grant. Identifier. Thus, the circuit courts have concluded that under the doctrine of noscitur a socissthe term “educational benefit” means “funds for education that a student receives in return for agreeing to provide services in the future”. In re McDaniel973 F.3d at 1096.
The Second Circuit said an educational benefit could be a military program in which the government pays the student’s tuition in exchange for the student working for the military for a limited time. See Homaidan, No. 20-1981, 2021 US App. LEXIS 20934, at *15. If the student fails to fulfill his obligation, he incurs an obligation to repay the funds that the military has expended for the educational benefit of the debtor. ID.
Circuit courts rejected Navient’s argument that educational benefits encompass private student loans. The circuit courts held that if Navient’s interpretation were correct, (A)(ii) would become a catch-all provision that would consume all loans of any type, making Section 523(A)(i) and (8)(B ) superfluous and meaningless. See for example, Homaidan, No. 20-1981, 2021 US App. LEXIS 20934, at *11 (“Navient’s wide reading . . . would draw virtually all student loans into the scope of Section 523(a)(8)(A)(ii)”, which ” would swallow” the other subsection of Section 523(a)(8)). The Tenth Circuit was a little harsher in its ruling: “No normal English speakers.” . . in the circumstances [ ] looks like student loans are obligations to repay funds received as an educational benefit. . . .also[,] no normal English speaker would say that mortgages are housing allowances or that car loans are considered transport allowances. In re McDaniel, 973 F.3d at 1096-97.
In conclusion, the growing trend is that a private student loan is not an educational benefit. The primary reason, among many others, is that if “educational benefit” were defined to include loans, the remaining subsections of Section 523(a)(8) would become redundant and meaningless. Moreover, the words surrounding the term “educational benefit” indicate that (A)(ii) focuses on debts incurred as a result of conditional grants, which the circuit courts have found are not loans, which they be private or otherwise. Accordingly, it seems safe to say that private student loans are not exempt from discharge under section 523(a)(8)(A)(ii).
This is Part II of a three-part blog post. Part I of this three-part blog post can be accessed by clicking this link. Part III of this blog post can be accessed by clicking this link.