Just because your private student loan uses the term “student loan” in the contract doesn’t mean it is one. If your private student loan is not a “qualified education loan” under the U.S. Bankruptcy Code, discharging it in a bankruptcy may be easier than you think. 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 contracts described as “student loans.”
A bankruptcy judge, however, can look beyond the label to make sure the loan meets all the legal requirements before it qualifies as a nondischargeable student loan. If it fails to meet any one of them, it is eligible for discharge just like a credit card. The U.S. Bankruptcy Code requires most private student loans to be a
qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986.
in order to be nondischargeable. One requirement for a “qualified education loan” under the Internal Revenue Code is that it 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. That is ultimately what happened with Ms. Davidson’s loan with Sallie Made agreeing that the loan was automatically discharged in her bankruptcy.
So how can you find out whether your student loan might qualify for the same treatment? First of all, 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 if you’re still unsure check your credit report. Federal student loans will only qualify for discharge if they meet the “undue hardship” test.
So what types of private student loans qualify for automatic discharge in a bankruptcy? Not all private student loans have to meet the “qualified education loan” test. Private loans that include a nonprofit business as part of the loan program do not have to be a ‘qualified education loan” test. That being said, If your loan is not from an “eligible educational institution,” it may be automatically dischargeable in a bankruptcy. 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 If your loan exceeds the “cost of attendance” for that school, it may qualify for automatic discharge although this argument has met with more resistance from judges. One of the biggest difficulties with private student loans is when a cosigner is involved. Students feel bad enough when they’re in default on their own loan, but when a relative gets involved it makes the situation doubly difficult. Well there may be a way to get relief for the relative who was a cosigner. If you were not a dependent of your cosigner as that term is defined in the Internal Revenue Code, your cosigner may be able to discharge the loan in a bankruptcy. For example, if your grandfather cosigns a private student loan you as his grand daughter and you are not his dependent, he may be able to automatically discharge his obligation in a bankruptcy. Since your cosigner usually has more money an assets and you, this may make your private student loan collector easier to deal with in terms of a reasonable payment if they don’t have a cosigner to pursue. \
The law is not ‘black and white’ and I don’t want to pretend there are no shades of gray in these issues. For example, some courts find private student loans qualify as an “educational benefit" under the Bankruptcy Code, and, therefore, are nondischargeable even if not a qualified educational loan. The more thoughtful judges have dismissed these holdings as ignoring the clear intent of the Bankruptcy Code and its legislative history. Private student loan debt is the worst debt in America. The law protecting student loans is so one sided it has become a “cash cow” for many banks and businesses. They know that even if making loans to 18 year olds leads to default, it still makes business senses because there is often a cosigner involved and even if there isn’t, at some point the student will be working and they don’t have to provide a reasonable payment plan and can just demand whatever the contract requires. I regularly get calls from graduates who are living at home with their parents or having a significant other pay all household expenses, just so they can afford to make their student loan payments. That’s depressing for anyone and one reason student loan lawyers are trying to come up with creative solutions to help level the playing field.
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) focusing on bankruptcy and student loans. He has successfully 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.