Some Private Student Loans Eligible for Automatic Discharge in Bankruptcy

What's in a name? Just because your private student loan uses the term "student loan" doesn't mean it is one. At least for purposes of the U.S. Bankruptcy Code, a student loan must be from an "eligible educational institution" to be considered nondischargeable. If it's not, getting rid of it in a bankruptcy can be easier than it looks. Jennifer Lynn Davidson knows this better than most.

She borrowed approximately $20,000 from Sallie Mae to attend CTI"s Co-Active Coach Training Program, signing promissory notes describing themselves as "student loans." She was troubled by instructors spending a significant amount of time trying to enroll students in further classes. but succumbed to the pressure, and signed up for another CTI program. While attending the first session, Ms. Davidson found herself being berated by the "instructor" who got in her face and swore at her as part of the "training." The final straw was when the instructor announced there would be a clothing optional pool party after the close of the program that day. She decided to leave and made arrangements to return home the next day. She immediately contacted CTI, notifying them of her withdrawal and requesting a refund of the unused portion of her fees. The problem of course was that she had signed approximately $20,000 of what Sallie Mae believed to be "student loans."

Labels can be deceiving, however, as a student loan must meet specific bankruptcy code requirements to avoid being automatically discharged in bankruptcy like a credit card. The U.S. Bankruptcy Code states a private student loan must be a

qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986.

To be a "qualified education loan" under the Internal Revenue Code, a loan must be from an "eligible educational institution." The Department of Education publishes a list each year of qualifying schools. If an institution is not on this list, the loan is not considered a "student loan" under the Bankruptcy Code, and, therefore, can be automatically discharged in bankruptcy. That is ultimately what Sallie Mae agreed to do, permitting Ms. Davidson to avoid the more difficult dispute over whether her loans posed an "undue hardship." So how can you find out whether your student loan is in fact from a qualified educational institution?

(1) First of all, be sure you know what type of loan you have. This argument only works for private student loans. Just because your loan is with Sallie Mae or Navient doesn't tell you whether it's a federal or private loan. Sallie Mae can be either. If you have any doubt, go to the National Student Loan Data System, and see if your loan is there. If it's not, it's almost certain to be a private student loan but check your credit report if you're still unsure.

(2) If it's a private rather than a federal student loan, then the next step is to see if the loan is from an "eligible educational institution." The Department of Education publishes a list of qualified educational institutions each year. You'll need to locate the list for the year you received your student loans and see if your school is on there.

(3) These are sound decisions, however, the law is not 'black and white' and some courts disagree. The more thoughtful jurists have dismissed these holdings as ignoring the clear intent of the Bankruptcy Code and its legislative history. Many courts are finding private student loans should also be considered as an "educational benefit" as that term is understood in the Bankruptcy Code. Private student loan debt is the most problematic debt in America. If this permits a few of you to free yourself from the prison private student loan debt has become, it was worth it.

The above is not intended as legal advice for your particular situation. Questions should be addressed to student loan attorneys admitted to practice within your state. Richard Gaudreau is a lawyer admitted to practice in New Hampshire (NH) and Massachusetts (Ma) with a specialty in bankruptcy and student loans. He has litigated student loan issues in the U.S. Bankruptcy Court, First Circuit Bankruptcy Appellate Panel, and Federal First Circuit Court of Appeals. He may be reached through his website at attorneygaudreau.com, by email at Richard@attorneygaudreau.com, or by calling 603-893-4300.