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Federal student loans are dischargeable in bankruptcy only based on undue hardship (a strict standard as interpreted by courts).  Creditors have worked hard to foster the misconception that the same standard applies to all private student loans. See, e.g., Student Borrower Protection Center, Morally Bankrupt: How the Student Loan Industry Stole a Generation’s Right to Debt Relief (Jan. 2022); Letter from Senators Durbin, Brown, Whitehouse, and Warren to CFPB Director Chopra (Feb. 10, 2022). In fact, private student loans are generally dischargeable in bankruptcy unless they meet each of ten conditions described below.

This article provides practice tips to determine if a specific private student loan is generally dischargeable and provides advice on dealing with private student loans in bankruptcy. The article then turns to remedies available to consumers subject to collection efforts after their private student loans are discharged in bankruptcy.  Also considered, even where there is no bankruptcy filing, are consumer remedies for misrepresentations made to a borrower that allege a private student loan is not generally dischargeable.  The article concludes with a brief discussion of remedies for other abuses related to private student loans.

Narrow Exception from Private Student Loan Dischargeability

Ordinarily unsecured loans (such as private student loans) are fully dischargeable in bankruptcy. The Bankruptcy Code provides three exceptions relating to educational obligations: 

  1. “An educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution.”  See 11 U.S.C. § 523(8)(A)(i);
  2. “An obligation to repay funds received as an educational benefit, scholarship, or stipend.” See 11 U.S.C. 523(8)(A)(ii); or
  3. “Any other educational loan that is a qualified education loan,” as defined in IRS Code § 221(d)(1). See 11 U.S.C. 523(8)(B).

The first exception applies to Federal Direct Loans, old Federal Family Education Loans (FFELs), and state guaranteed loans. It also applies to a private loans funded in part by a government entity or non-profit (perhaps including non-profit credit unions).  This exception applies to virtually no private student loans, and this article will examine private student loans where this exception does not apply.

Courts find that the second exception does not apply either. A private student loan is not a scholarship or stipend, and the overwhelming body of judicial authority finds that it is not an “educational benefit” either. See Homaidan v. Salle Mae, Inc., 3 F.4th 595 (2d. Cir. 2021); In re McDaniel, 973 F.3d 1083 (10th Cir. 2020) (“No normal speaker of English ... would say that student loans are obligations to repay funds received as an educational benefit”); In re Crocker, 941 F.3d 206, 209 (5th Cir. 2019). That a private loan is an “educational benefit” is inconsistent with the full text of 11 U.S.C. § 523(8)—the other two exceptions would be unnecessary if “education benefit” included loans.  Such an interpretation is also inconsistent with the provision’s legislative history. See generally NCLC’s Student Loan Law § 11.2.3.3.  If the other two exceptions do not apply, then lenders must prove that a private student loan is a “qualified education loan” under the third exception.

10 Tips to Determine if a Private Student Loan Is a “Qualified Education Loan”

The Bankruptcy Code determines whether a private student loan is a “qualified educational loan” based on a definition set out in the IRS Code to determine if student loan interest is deductible from income for federal tax purposes. That IRS definition of a “qualified education loan” requires the loan be used for “qualified educational expenses” by an “eligible student” attending an “eligible educational institution.” As a result, this requires a creditor bear the burden to show a private student loan meets ten conditions described below. If the lender can prove that all ten conditions apply, then the loan is only dischargeable if the consumer can show undue hardship. But at the time of loan origination if any of the ten conditions do not apply, then the loan is dischargeable.

  1. The School Must Be Eligible:  a qualified educational loan must be used to attend an “eligible educational institution,” defined as an institution eligible to participate in federal student financial assistance programs administered by the Department of Education. See 26 U.S.C. § 25A(f)(2); NCLC’s Student Loan Law § 11.2.3.4.4The Department of Education’s Federal School Code List is a current listing of all eligible institutions, and is a good starting place, even though it does not indicate whether a school was eligible at the time a loan was originated. The easiest way to find a link to an earlier version of the Federal School Code List on the Department’s website is to search on a browser for “federal school code list” and each year the student attended. That information is difficult to find on the Department’s website any other way. You can also submit a FOIA request for that information, if necessary. Sample FOIA requests are available in Word format at NCLC’s Student Loan Law “Practice Tools.” 
  2. The Loan Must Pay for School Attendance: the loan must be used exclusively to pay for educational expenses, as defined as the amount the school is required to publish as the average cost of attendance, including tuition and fees, room and board, books, supplies, and equipment, and other necessary expenses (such as transportation).  See IRS Publication 970.  The average cost of attendance for a student’s school, in the year(s) the student attended, should be published each year in the school’s catalog.  If an older catalog is not available on a school’s website, it can often be found by searching the Internet Archive Wayback Machine at https://archive.org/web.  Another option is to download the All College Scorecard spreadsheet at for the year(s) the student attended.  There the total cost of attendance, if available, may be obtained by adding up the applicable rows, such as “Booksupply,” “Roomboard_on,” “Otherexpense_on,” “Roomboard_off,” “Otherexpense_off,” and “Otherexpense_fam.” The loan amount cannot be greater than the published amount at the time of loan origination reduced by any stipends, scholarships, grants or other loans received by the student. If the loan amount is excessive, the whole loan is dischargeable in bankruptcy.
  3. The Loan Must Be Close in Time to the Educational Expenses: the loan must be paid or incurred within ninety days before or after an academic period, or otherwise that all the relevant facts and circumstances indicate that it is within a reasonable time. See IRS Publication 970.
  4. The Student Must Be Enrolled at Least Half Time:  to be eligible, a student must take at least half of a full-time workload, as determined by the school, which cannot be lower than Department of Education standards.  See IRS Publication 970.
  5. The Course of Study Must Qualify: enrollment must be in a course of study leading to a degree or certificate.  See 20 U.S.C. §§ 1091(b)(3).  A short-term course not leading to a degree does not qualify.
  6. Student Cannot Be Undocumented:  an eligible student is a U.S. citizen, national, or permanent resident, or someone who can prove residence in the United States for other than a temporary purpose with the intention of becoming a citizen or permanent resident.  20 U.S.C. § 1091(a)(5).
  7. Student Cannot Be Incarcerated: an incarcerated student is not an eligible student. 20 U.S.C. § 1091(b)(5).
  8. Students Must Be Eligible:  most commonly, students are not eligible for Higher Education Act Title IV funding if they lack a high school diploma or GED and their school failed to properly administer an ability-to-benefit test before July 1, 2012.  After July 1, 2014, under 20 U.S.C. § 1091(d), such a student must have met other alternative criteria than an ability-to-benefit test. There are other types of eligibility criteria a student may not have met. See NCLCs Student Loan Law § 10.4.
  9. Borrower Must Be Closely Related to the Student:  the borrower must either be the student, the student’s spouse, or someone who claims the student as a dependent. See NCLC’s Student Loan Law § 11.2.3.4.3.
  10. Borrower Must Be a Taxpayer: the statute provides that for the loan to be eligible the borrower must be a “taxpayer.”  See NCLC’s Student Loan Law § 11.2.3.4.3.

That a borrower admits in a private student loan promissory note or related documents that the loan is not dischargeable in bankruptcy does not make it not dischargeable in bankruptcy.  See In re Huang, 275 F.3d 1173, 1177 (9th Cir. 2002) (“It is against public policy for a debtor to waive the pre-petition protection of the Bankruptcy Code. This prohibition of prepetition waiver has to be the law; otherwise, astute creditors would routinely require their debtors to waive”). A closer call is where a consumer admits to facts that make a loan non-dischargeable, such as the consumer affirming the loan proceeds are for educational expenses. But the lender’s argument should be defeated where the loan proceeds exceed the institution’s published educational expenses.

Private Student Loan Bankruptcy Counseling

Make sure a borrower considering bankruptcy understands whether a private student loan is dischargeable. Even if a qualified education loan, the loan may be discharged for undue hardship, but this is a tough standard to meet. It is particularly so for federal student loans, where income contingent payment plans as low as zero dollars may be available. These plans though are generally not available for private student loans, so this is not a factor preventing the borrower from arguing for undue hardship. See NCLC’s Student Loan Law § 11.2.3.4.1.

A debtor in bankruptcy at any time can bring a proceeding to determine if a student loan is dischargeable based on undue hardship. Such an action usually must be commenced by a complaint pursuant to the adversary proceeding rules.See NCLC’s Consumer Bankruptcy Law and Practice § 15.4.3.8.3.

On the other hand, a private student loan is discharged if it does not meet the conditions described above.  But the fact that the loan is discharged may not be apparent, because the court’s general discharge order does not indicate whether a particular debt has been discharged. At a minimum, the bankruptcy attorney should advise the consumer as to this ambiguity and the consumer’s rights after the bankruptcy discharge and the consumer’s appropriate actions if the consumer is subject to further collection on the private student loan.

Since the lender has the burden of proving that the private student loan meets all conditions for being excluded from a general discharge, it may be advisable to bring an adversary proceeding in the bankruptcy court seeking a declaratory judgment that the loan has been discharged.  While such action may be initiated by the debtor, the lender or current loan holder has the initial burden to prove that the loan is a qualified education loan that is excepted from discharge. Such a declaratory judgment both provides clarity for the consumer and strengthens the consumer’s remedies if subject to ongoing collection efforts.

A Discharged Private Student Loan Offers Borrowers Complete Protection

A bankruptcy discharge is a court injunction issued against collection on the discharged debt.  The injunction prohibits any communication with the consumer seeking to collect on the discharged debt, any action initiating or continuing a collection lawsuit, or any attempt to enforce a judgment through wage garnishment, freeze of bank accounts, and the like. Nor can creditors sell a discharged debt to a debt buyer, roll the debt into a new loan, or condition a new loan on the consumer paying the discharged loan. See NCLC’s Consumer Bankruptcy Law and Practice § 15.5.1.4.

The discharge automatically voids any judgment on a private student loan obtained before or after the bankruptcy, even if the creditor was unaware of the discharge or believed reasonably that it did not apply to the student loan. See 11 U.S.C. § 524(a)(1). The debtor need take no action to protect against such a judgment, but the better course is to seek relief in state court or more prudently in the bankruptcy court, since that court is likely to be more familiar with the applicable law. See NCLC’s Consumer Bankruptcy Law and Practice § 15.5.1.3.

Civil Contempt for Violation of the Discharge Injunction

Any violation of a discharge injunction violates a bankruptcy court’s order, potentially resulting in a civil contempt finding. The court can assess a remedy of payment to the consumer for actual damages, punitive damages, and attorney fees. There is no statute of limitations and relief can be afforded to all similarly affected borrowers where the same creditor violated the same court’s discharge injunction. 

It is possible a consumer may be able to bring an affirmative action to recover from a discharge injunction violation. See NCLC’s Consumer Bankruptcy Law and Practice § 15.5.1.4. But the better approach is for the consumer to ask the court to issue a civil contempt order—typically by the judge who issued the discharge order in the reopened bankruptcy case or a judge in the same bankruptcy district.  See, e.g., In re Belton v. GE Capital Retail Bank, 961 F.3d 612, 616–617 (2d Cir. 2020).

Creditors may claim that they should not be held in contempt because there had been no discharge determination and they had assumed the private student loan was not dischargeable.  The Supreme Court in Taggart v. Lorenzen, 139 S. Ct. 1795 (2019), has ruled that if a lender has knowledge of a bankruptcy discharge and takes intentional actions believing that the discharge does not apply to its actions, then the lender is in contempt “if there is no fair ground of doubt as to whether the order barred the creditor’s conduct…. In other words, civil contempt may be appropriate if there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful.”  

As described above, it will be hard for a lender to argue that it thought the second exception applied, that the loan was an “educational benefit,” in the face of the clear-cut rulings of the three recent circuit court of appeals decisions described earlier. The lender will then have to claim that it had an objectively reasonable basis for concluding that the loan was dischargeable because it believed that the loan met all ten conditions described above, as required for the third exception to apply.

Debt collectors and debt buyers may claim they are not covered by the discharge order and have no knowledge of the order. The creditor should be in contempt for selling a discharged debt or for hiring a collector to collect on a discharged debt.

FDCPA Remedies for Discharge Injunction Violations

Every circuit ruling on the issue—except the Ninth Circuit—and most lower courts allow for Fair Debt Collection Practices Act (FDCPA) claims for violation of the bankruptcy discharge. See NCLC’s Fair Debt Collection § 13.7.2. The Ninth Circuit’s minority view is that, the Bankruptcy Code does not provide an explicit private right of action for discharge violations, a private action should not be available under other statutes either. See NCLC’s Fair Debt Collection § 13.7.2.4.

Except in the Ninth Circuit, the FDCPA is a powerful remedy.  Unlike civil contempt, the FDCPA is a strict liability statute, offering only certain statutory defenses, such as bona fide error. There can be an FDCPA violation even if these parties are unaware of the bankruptcy or thought the loan non-dischargeable. See NCLC’s Fair Debt Collection § 13.7.2.8.   

Nor can collectors escape FDCPA liability by adding boilerplate language to collection contacts indicating that the collector is not seeking to collect a debt if the debt has been discharged in bankruptcy. Courts find that if the communication, considered in its full context, could lead an unsophisticated consumer to believe that the debt collector is demanding payment of the debt as a personal liability of the debtor, then boilerplate disclaimers do not insulate the debt collector from FDCPA liability. See NCLC’s Fair Debt Collection § 13.7.2.8FDCPA liability can be found not only for collection contacts after the discharge, but also where the collector fails to adjust the consumer’s credit report to reflect the bankruptcy discharge.

Creditors generally are not subject to the FDCPA, which only applies to entities falling within the Act's definition of "debt collector," such as third-party collection agencies, debt buyers, and collection attorneys. See NCLC’s Fair Debt Collection § 4.7. State debt collection and deceptive practices statutes and tort theories should be available against these creditors. The majority view is that the Bankruptcy Code does not preempt such state claims. See NCLC’s Fair Debt Collection § 13.7.4.

FDCPA cases can be brought in or outside the bankruptcy court, and remedies include actual damages and up to $1000 statutory damages plus attorney fees. Class actions are available; statutory damages for the class are capped at $500,000.  There is a one-year statute of limitations for FDCPA claims.

Creditor Misrepresentations About Private Student Loan Dischargeability

There are reports of creditors (at the time of loan origination) and debt collectors, debt buyers, and collection attorneys (after that) engaging in widespread unfair or deceptive practices as to the borrower’s rights to discharge the private student loan in bankruptcy. See, e.g., Student Borrower Protection Center, Morally Bankrupt: How the Student Loan Industry Stole a Generation’s Right to Debt Relief (Jan. 2022); Letter from Senators Durbin, Brown, Whitehouse, and Warren to CFPB Director Chopra (Feb. 10, 2022).

Borrowers should be able to bring state deceptive practices act (UDAP) claims for such deceptive or unfair conduct.  Ambiguous statements can be actionable under s state UDAP statute, particularly where the consumer is unsophisticated. See NCLC’s Unfair and Deceptive Acts and Practices §§ 4.2.11, 4.2.13.  The failure to disclose material facts can be actionable. Id. § 4.2.15. There need not be an intent to deceive. Id. § 4.2.4.  Subsequent clarification is not a defense. Id.  § 4.2.16. Inclusion of unenforceable terms in the note (such as the borrower agreeing that the obligation is not dischargeable in bankruptcy) can be unfair or deceptive.  Id. § 4.3.4.

UDAP remedies vary by state, but generally include actual damages, attorney fees, and either minimum statutory, treble, or punitive damages. Id. Chapter 12.  Even where a national bank is the creditor, courts generally find no federal preemption of state UDAP claims.  Id. § 2.5.3.2.3.  Nevertheless, in a few states the UDAP statute does not apply to credit transactions or to debt collection.  Id. §§ 2.2.1, 2.2.2 Misrepresentations made by a debt collector, a debt buyer, or a collection attorney also should be actionable under the Fair Debt Collection Practices Act. See NCLC’s Fair Debt Collection Chapter 7.  Common law tort and other state statutes may also apply.

Other Claims and Defenses Involving Private Student Loans

A creditor is clearly subject to claims and defenses relating to its own conduct in originating private student loans, and there are widespread reports of abuses in that origination, particularly in the subprime market.  For example, Navient, a major lender of private student loans, has just agreed to discharge $1.7 billion of private student loans based on abusive practices alleged by thirty-seven state attorneys general.

Private student loans may also be extended to students attending for-profit schools where the schools engage in unfair or deceptive practices involving their students.  The FTC Holder Notice should be in all private student loans originated by the school or where there is a referral or other business relationship between the school and the lender. The notice provides that the lender (or its assignee) is subject to all the defenses and claims that the borrower could raise against the school.  If the required notice is not present, then the borrower has a number of alternative theories to reach the same result. See generally NCLC’s Federal Deception Law Chapter 4.

Debt buyers purchasing private student loan notes cannot claim holder-in-due-course status to avoid the consumer’s defenses against the originating lender.  The very inclusion of the FTC Holder Notice and the fact that the debt buyer purchased the note after the consumer’s default are two of the potential grounds that defeat holder-in-due-course status. See NCLC’s Mortgage Lending § 10.7.

Acknowledgment of Other Contributors to This Article 

We would like to thank the following NCLC staff attorneys for providing extensive assistance, information, and legal approaches contributing to this article: John Rao, Geoff Walsh, Robyn Smith, Kyra Taylor, and Jon Sheldon.

 

Author Name: 
Amber Saddler & Ben Kaufman
About Author: 

Amber Saddler is Counsel at the Student Borrower Protection Center. Prior to joining the SBPC, Amber was the Dorot Fellow at the Alliance for Justice. In this role, she researched and prepared reports on the records of potential judicial nominees, monitored Congressional proceedings for confirmations to the federal judiciary, and wrote about Supreme Court and lower federal court decisions affecting civil rights and access to justice issues.

Ben Kaufman is the Head of Investigations and Senior Policy Advisor at the Student Borrower Protection Center. Prior to joining SBPC, Ben worked as a Director’s Financial Analyst at the Consumer Financial Protection Bureau and in investment banking at JPMorgan. At the Bureau, Ben focused much of his work on student loans, for-profit colleges, and income share agreements. He also served on a cross-bureau working group on credit cards.

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Thursday, February 10, 2022
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