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Educational Benefit Isn’t What it may Appear at First Blush

Christie_1One of the early and frequent arguments made by opposing counsel in our private student loan discharge adversaries in bankruptcy is that the student loans were made for an educational benefit and thus are excluded from discharge.  Specifically, Section 523(a)(A)(ii) exempts from discharge “an obligation to repay funds received as an educational benefit, scholarship, or stipend.”  The creditors’ attorneys’ argue that there is ample case law to support that assertion.

The “ample” case law referenced by opposing counsel is an older view replaced by the current view clearly supported now by three circuits.  In other words, appellate law from these three circuits have more precedential value than trial level opinions often cited by defense counsel.  Bottom line, this is the typical initial creditor response that no longer has any merit.  It’s meant to test your knowledge in my opinion.  Many who are bringing these cases for the first time would fold because a student loan certainly appears to have an educational benefit at first blush.

The Second, Fifth and Tenth Circuit have recently affirmed that private student loans are not “obligation[s] to repay funds received as an educational benefit, scholarship, or stipend” – and thus not covered under 523(a)(8)(A)(ii).  See Homaidan v. Sallie Mae, Inc.

Simply put this provision was never intended to cover loans per se, but rather employer tuition plans, stipends or scholarships.  Loans are covered elsewhere in Section 523(a)(A) and in order to be protected from discharge they must be qualified education loans or properly backed by a non-profit guarantee.  Many of the private student loan cases we bring are not covered by either and thus are discharged in part or full.,bankruptcy%20absent%20an%20undue%20hardship.

If you are considering trying to discharge federal or private student loans in a bankruptcy, it’s important to hire counsel whose been doing this for awhile and knows what they are doing for the best results.  Or at least someone who associates with experienced counsel who can rebut legal arguments along the way.

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