I am often asked if “private” student loans can be discharged in bankruptcy. The answer is yes, if the loan(s) meet several criteria. Bankruptcy code section 523(a)(8) describes which student loans are not forgiven and by implication which are. Any obligation that meets the legal definition of a student loan will survive bankruptcy unless several conditions are met. The threshold question is whether your debt is a “student loan” and therefore subject to additional discharge limitations. The law describes a student loan as an obligation to repay funds received as an educational benefit, educational scholarship or educational loan. Assuming your loan is a student loan it will only be discharged if all the following criteria are met:
1. No governmental unit involved. This includes loans made, insured or guaranteed by a governmental unit. Approximately 90% of student debt falls in this category, including loans made by the Department of Education, Sallie Mae, Nelnet, and Navient.
2. Not funded in whole or in part by a non-profit. Some universities are non-profit institutions while others are for profit. Note: the term non-profit does not mean all the workers are volunteers.
3. Not a qualified educational loan as defined by Internal Revenue Code. Internal Revenue Code section 221(d)(1) references several other statutes but essentially describes the cost of attendance at an institution participating in federal (called Title IV) student loan programs. Eligible institutions are listed in the U.S. Department of Education’s Participating Schools List. The list is updated quarterly. For 2015-2016 there are approximately 750 California institutions listed, from large universities to tiny trade schools. If your loan qualifies for any type of tax deduction, that is a strong indicator your loan is a qualified educational loan under Internal Revenue Code section 221(d)(1).
A couple examples may help illustrate how these rules are applied.
College Credit Card – While you were a student at a large public university you applied for and received a “student” credit card from a major bank like Bank of America, Citibank or Chase. The card has the name of the university and the image of the school’s mascot. You used the card to purchase books and school supplies. Although the credit card was described as a “student” card it will not be considered a student loan for bankruptcy purposes because its use is not limited to educational purposes. Use of the university’s name and mascot may promote school spirit but will not make this a student loan for bankruptcy purposes.
Tuition and Housing Loan – You apply through the Department of Education for loans to pay for tuition and housing at a small private university. You receive the loans and graduate. Upon graduation you receive statements from Nelnet or Navient. This is a student loan because it was given strictly for the purpose of education and was made or insured by the government. These loans will not be discharged in bankruptcy.
Trade School – You enroll and attend a for-profit trade school. The school lends you the tuition and informs you that you will not be able to deduct the interest from your taxes. Upon graduation you are billed by the school. This appears to be a dischargeable debt in bankruptcy.
Suppose your loan does not qualify for discharge for one or more of the reasons discussed here, all is not lost. The bankruptcy laws allow the judge to discharge a student loan that would otherwise not be forgiven if failing to discharge the loan will create an undue hardship. A discussion of hardship discharge is beyond the scope of this post but readers are advised hardship discharges are very rare.
Special Rules for Healthcare Loans – Loans made pursuant to the Health Education Assistance Loan Act are subject to different and stricter standards.
Student loan discharge is a complex and evolving area of bankruptcy law and anyone contemplating a bankruptcy should discuss the details of their situation with a lawyer.
At the Law Office of Michael Primus we have helped thousands of clients get out of debt, stop wage garnishments, and start fresh through bankruptcy. If you live in Contra Costa, Alameda or Solano counties and have debt problems, contact us for a free in-office consultation. We have offices in Walnut Creek, Antioch, and Hercules.