May 2022 - Gupta Evans and Ayres

Are Private Student Loans Dischargeable in Bankruptcy Court? An In-Depth Examination of Each Sub-Section of Section 523 (a)(8) of the Bankruptcy Code—Part III

May 3, 2022/in All Blog Posts, Bankruptcy/by Dylan Contreras

This is a three-part article that explores whether private student loans are excepted from discharge under Section 523 (a)(8) of the Bankruptcy Code. Section 523 (a)(8) includes three categories of non-dischargeable student loan debt. Part I of the blog article discussed Section 523 (a)(8)(A)(i) and can be accessed here. Part II of the blog article discussed Section 523 (a)(8)(A)(ii) and can be accessed here. This is Part III of the blog article and explores the last category of non-dischargeable student loan debt, Section 523 (a)(8)(B).

Section 523 (a)(8)(B) — “Qualified Education Loan”

The last non-dischargeable exception states that “any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986 incurred by a debtor who is an individual” is non-dischargeable unless repaying the debt would impose an undue hardship on the debtor and their dependents. 11 U.S.C.S. 523 § (a)(8)(B) (emphasis added). Section 523 (a)(8) leads the reader through a statutory trail and, therefore, requires a detailed explanation of each section mentioned in the statute.

Section 221 (d)(1) of the Internal Revenue Code (“IRC”) states that a “qualified education loan” is any indebtedness incurred by the taxpayer solely to pay for “qualified higher education expenses.” The term “qualified higher education expenses” in Section 221 (d)(1) of the IRC means any expenses used to fund the student’s education, such as tuition, books, supplies, room and board, and other related expenses. See 26 U.S.C.S. § 221 referring to 20 U.S.C.S. § 1087ll. Moreover, the “qualified higher education[al] expenses” must be directed towards an “Eligible Educational Institution.” See 26 U.S.C.S. § 221 referring to 26 U.S.C.S. § 25A. Whether private, non-profit, or government-funded, most accredited universities are “Eligible Educational Institutions.”[i]

Despite the complexity of Section 523 (a)(8)(B), Bankruptcy Courts throughout the country appear to agree that Section 523 (a)(8)(B) encompasses private student loans. For instance, in Conti v. Arrowood Indem. Co. (In re Conti), 982 F.3d 445 (6th Cir. 2020), the debtor received loans from CitiBank to fund her college education and then later sought to discharge the private debt through a Chapter 7 bankruptcy. There was no dispute that the loan proceeds were for the debtor, the debtor was an eligible student when she incurred the debt, and the loan funds were directed to an accredited institution. The sole issue on appeal was whether the overall purpose of the loan was to fund the debtor’s education. See In re Conti, 982 F.3d at 446-47.

The Circuit Court held that the purpose of the loan proceeds can be “centrally discerned from the lender’s agreement with the borrower.” Id. at 448-49. The Circuit Court found that the promissory notes explicitly stated that the loan was for educational expenses at the named institution and even specified that the loan proceeds were intended to pay for the debtor’s tuition. Id. Accordingly, the Appellate Court held that the private student loan was a “qualified education loan” and, thus, was non-dischargeable under Section 523 (a)(8)(B).

The Bankruptcy Court in the District of Alaska reached a similar conclusion in the case of Rizor v. Acapita Educ. Fin. Corp. (In re Rizor), 553 B.R. 144 (Bankr. D. Alaska 2016). In that case, the debtor took out a private student loan to fund his attendance at a private, for-profit veterinary school located in Grenada. Unlike In Re Conti, the primary issue was whether the veterinary school was an eligible educational institution (“EEI”). In re Rizor, 553 B.R. 144. The Bankruptcy Court held that the institution was an EEI because Section 1002 of the U.S. Education Code provided a carve-out for specific, off-shore veterinary schools. Id.

At first blush, Section 523 (a)(8)(B) appears to provide a safe haven for private student loans. However, it is important to note that Section 523 (a)(8)(B) is extremely dense and statutorily driven. Part III of article only touched on this subsection’s most important and relevant parts. The cases cited above offer guidance to Bankruptcy Courts on the innerworkings of Section 523 (a)(8)(B), but do not flush out each moving-part of this exception. Needless to say, wise attorneys on both sides of the aisle will continue to uncover other legal issues that will undoubtedly make this subsection more difficult to navigate.

Conclusion

This three-part blog article touched on each non-dischargeable student loan debt category in Section 523 (a)(8) of the Bankruptcy Code. Part I of the blog article, which can be accessed here, focused on Section 523 (a)(8)(A)(i) and concluded that the term “funded” takes on many definitions, depending on the type of loan program at play. Part II of the blog article can be accessed here and was focused on Section 523 (a)(8)(A)(ii), which does not provide a safe haven for private lenders. There appears to be a consensus amongst the Circuit Courts that Section 523 (a)(8)(A)(ii) is not focused on loans at all; instead, the sub-section is aimed at non-conditional grants, such as stipends and scholarships. Part III of the article was discussed above and examined the intricate statutory trail created by Section 523 (a)(8)(B) of the Code.

Analyzing all three non-dischargeable exceptions under Section 523 (a)(8), it appears that private student loans are non-dischargeable in two instances. Under Section 523 (a)(8)(A)(i), a private student loan is excepted from discharge if a non-profit entity was part of a loan program that facilitates loans to students in need of financial assistance, and the non-profit entity guaranteed the loan or purchased the loan from the original lender. Section 523 (a)(8)(B) is also a safe haven for private lenders. The threshold issue under Section 523 (a)(8)(B) is that the private student loan must be a “qualified education loan,” which requires the proponent to jump through multiple statutory hurdles.

This is Part III of a three-part blog article. Part I of this three-part blog article can be accessed by clicking on this link. Part II of this blog article can be accessed by clicking on this link.

[i] The IRS website specifically states: Eligible Educational Institutions “include[] most accredited public, non-profit and privately-owned–for-profit postsecondary institutions.”

https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/eligible-educational-inst#:~:text=An%20eligible%20educational%20institution%20is,the%20U.S.%20Department%20of%20Education.

Are Private Student Loans Dischargeable in Bankruptcy Court? An In-Depth Examination of Each Sub-Section of Section 523 (a)(8) of the Bankruptcy Code—Part II

May 3, 2022/in All Blog Posts, Bankruptcy/by Dylan Contreras

This is a three-part article that explores whether private student loans are excepted from discharge under Section 523 (a)(8) of the Bankruptcy Code. Section 523 (a)(8) includes three categories of non-dischargeable student loan debt. Part I of the blog article discussed Section 523 (a)(8)(A)(i) and can be accessed here. This is Part II of the blog article and discusses Section 523 (a)(8)(A)(ii). Part III of the blog article explores the last category of non-dischargeable student loan debt, Section 523 (a)(8)(B) and can be accessed here.

Section 523 (a)(8)(A)(ii)—What is an “educational benefit”?

The text of Section 523 (a)(8)(A)(ii) (hereinafter “(A)(ii)”) states that an “obligation to repay funds received as an educational benefit, scholarship, or stipend” is non-dischargeable unless repaying the debt would impose an undue hardship on the debtor and the debtor’s dependents.

When determining whether private student loans fall under (A)(ii), Bankruptcy Courts are confronted with two issues. The Bankruptcy Court must first determine whether the debtor actually received funds from the private lender for educational purposes. The second prong of the analysis requires a determination of whether the private student loan debt is an “educational benefit, scholarship, or stipend.” 11 U.S.C.S. § 528 (a)(8). Nearly all private lenders and loan servicers attempt to couch private student loans under the term “educational benefit” and avoid arguing that a private student loan is a scholarship or stipend. The primary reason is that the terms “stipend” and “scholarship” “signify granting, not borrowing” and generally do not need to be repaid by the debtor, whereas a loan must be repaid. McDaniel v. Navient Sols. LLC (In re McDaniel), 973 F.3d 1083, 1094 (10th Cir. 2020). On the other hand, the term “educational benefit” is much broader and leaves room for arguing that private student loans confer an educational benefit on the debtor. See Crocker v. Navient Sols., L.L.C. (In re Crocker), 941 F.3d 206, 219 (5th Cir. 2019) (“[t]he key phrase, “educational benefit,” is the broadest”). As a result, the second prong hinges on the Bankruptcy Court’s interpretation of “educational benefit.”

The first element—whether the debtor actually received funds—was discussed in two cases originating in the Ninth Circuit. In the case of In re Kashikar, the Bankruptcy Court held that the term “funds received” means “cash advanced to or on behalf of the debtor.” Kashikar v. Turnstile Capital Mgmt., LLC (In re Kashikar),567 B.R. 160, 166 (Bankr.9th Cir. 2017) (citations omitted). The Bankruptcy Court found that the debtor “received the funds” when the private lender disbursed the loan proceeds directly to the institution because the funds were dedicated towards paying for the student’s education. Id at 166-67.

In comparison, a debtor does not receive funds when the educational institution gives the debtor a tuition credit in which the institution agrees to be paid at a later date. In Inst. of Imaginal Studies v. Christoff (In re Christoff), 527 B.R. 624 (B.A.P. 9th Cir. 2015), the institution offered the debtor $6,000 of financial aid in the form of a tuition credit. Id. at 625-26. The debtor was required to repay the credit upon completing her course work. Id. The Bankruptcy Appellate Panel for the Ninth Circuit found that the institution agreed to discount the student’s tuition by $6,000 for a limited time and agreed to be paid the credit at a later date. Id. at 633-35. There was no cash advanced to or on behalf of the debtor, nor were any funds exchanged between the student, the institution, or a lender. Id. Therefore, the Bankruptcy Appellate Panel discharged the student loan debt because the Court found that the debtor did not “actually receive funds.” In summary, in order to satisfy the first prong of the (A)(ii) analysis, the lender must direct the loan proceeds to the debtor or the educational institution.

Before turning to the case law on the second issue, it is important to provide some background information. Navient Solutions, LLC (“Navient”) is a nationwide student loan servicing corporation and is the adverse creditor in the cases described below. In each case, Navient argued that the term “educational benefit” was broad enough to encompass private student loans. The Court of Appeals for the Second, Fifth, Ninth, and Tenth Circuits (the “Circuit Courts”) disagreed and concluded that private student loans do not fall under the umbrella of an “educational benefit” and, as a result, are not excepted from discharge under (A)(ii).

Each Circuit Court started its analysis by examining the statutory text of Section 523 (a)(8). The Circuit Courts noted that the term “loan” was included in Section 523 (A)(i) and (8)(B)—the other two exceptions in Section 523 (a)(8)—but was omitted from Section 523 (8)(A)(ii). The Fifth Circuit, in In re Crocker, observed that “Congress sandwiched subsection (A)(ii), which does not mention loans at least by name, between two subsections that explicitly do,” which indicates that “educational benefits are not loans.” In re Crocker, 941 F.3d at 219. The Second Circuit in Homaidan v. Sallie Mae, Inc. 2021 U.S. App. LEXIS 20934, at *10 (2d Cir. July 15, 2021, No. 20-1981) reached a similar conclusion and found that the “term “loan” is used several times in Section 523 (8)(A) but is absent from § 523 (a)(8)(A)(ii), signaling that the omission was intentional.” The Circuit Courts held that the omission of the word “loan” from (A)(ii) suggested that Congress’ intended to create a category of student debts that were not incurred through private or federal loans.

The Circuit Courts’ analysis continued and they defined the term “educational benefit” as used in (A)(ii). Because the term was left undefined by Congress, the Circuit Courts applied the statutory canon of noscitur a sociss. The cannon helps Bankruptcy Courts define a vague word included in a list by examining the other terms surrounding the disputed word. See Homaidan, 2021 U.S. App. LEXIS 20934 at *13 (“the meaning of doubtful terms or phrases may be determined by reference to their relationship with other associated words or phrases”) quoting United States v. Dauray, 215 F.3d 257 (2d Cir. 2000) see also In re Crocker, 941 F.3d 206, 218-219 (“noscitur a sociis. . . . tells us that statutory words are often known by the company they keep”).

To repeat, the text of (A)(ii) is: “obligation to repay funds received as an educational benefit, scholarship, or stipend.” 11 U.S.C.S. § 523 (8)(A)(ii). The Fifth Circuit found that when a student receives a stipend or scholarship, he is not required to repay the entity that awarded him the stipend or scholarship. As the Tenth Circuit succinctly put it, a “stipend. . . .is a fixed and regular payment, such as a salary, and a scholarship. . . .is a grant of financial aid to a student,” and both do not normally need to be repaid.” In re McDaniel, 973 F.3d at 1097. Similarly, the word “benefit,” as used in “educational benefit,” implies a payment, gift, or service, that does not need to be repaid. Id.

The Circuit Courts’ interpretation of “benefit,” “scholarship,” and “benefit” indicate that (A)(ii) was narrowly tailored to except from discharge “conditional grants” that are required to be repaid if certain service obligations are not satisfied. See In re McDaniel, 973 F.3d at 1102 (the common quality linking together the items in the statutory phrase “educational benefit, scholarship, or stipend” is that they can all naturally be read to describe “conditional payments”) (citations omitted). The Circuit Courts further noted that the primary distinction between loans and conditional payments is that loans—whether private or federally backed—require repayment at a specific date by the debtor. In re Crocker, 941 F.3d at 219-221. In comparison, conditional grants must only be repaid if the debtor does not fulfill its responsibilities under the grant. Id. Thus, the Circuit Courts found that under the doctrine of noscitur a sociss, the term “educational benefit” means “educational funds that a student receives in exchange for agreeing to perform services in the future.” In re McDaniel, 973 F.3d at 1096.

The Second Circuit stated that an educational benefit could be a military program in which the government pays for the student’s tuition in exchange for the student working for the military for a limited time. See Homaidan, No. 20-1981, 2021 U.S. App. LEXIS 20934, at *15. If the student fails to fulfill their obligation, they incur an obligation to repay the funds the military dedicated towards the debtor’s educational benefit. Id.

The Circuit Courts rejected Navient’s argument that educational benefits encompass private student loans. The Circuit Courts held that if Navient’s interpretation were correct, (A)(ii) would become a catch-all provision that would consume all loans of any type, which would render Section 523 (A)(i) and (8)(B) superfluous and meaningless. See e.g., Homaidan, No. 20-1981, 2021 U.S. App. LEXIS 20934, at *11 (“Navient’s broad reading. . . .would draw virtually all student loans within the scope of § 523(a)(8)(A)(ii)”, which would “swallow up” the other sub-section of Section 523 (a)(8)). The Tenth Circuit was a little harsher in its ruling: “no normal speaker of English . . . in the circumstances [ ] would say that student loans are obligations to repay funds received as an educational benefit. . . .likewise[,] no normal speaker of English would say that mortgages are housing benefits or that automobile loans qualify as transportation benefits.” In re McDaniel, 973 F.3d at 1096-97.

In conclusion, the growing trend is that a private student loan is not an educational benefit. The primary reason, among many others, is that if “educational benefit” was defined to include loans, the remaining sub-sections of Section 523 (a)(8) would become superfluous and meaningless. Moreover, the words surrounding the term “educational benefit” indicate that (A)(ii) is focused on debts that are incurred as a result of conditional grants, which the Circuit Courts agree are not loans, whether private or otherwise. As a result, it appears that it is safe to say that private student loans are not excepted from discharge under Section 523 (a)(8)(A)(ii).

This is Part II of a three-part blog article. Part I of this three-part blog article can be accessed by clicking on this link. Part III of this blog article can be accessed by clicking on this link.

Are Private Student Loans Dischargeable in Bankruptcy Court? An In-Depth Examination of Each Sub-Section of Section 523 (a)(8) of the Bankruptcy Code—Part I

May 3, 2022/in All Blog Posts, Bankruptcy/by Dylan Contreras

In the United States, student loans have exceeded $1.6 trillion, making student loans a central focus amongst Chapter 7 and 13 debtors. Student loans facilitated or guaranteed by the U.S. government or a non-profit institution are non-dischargeable in bankruptcy court, pursuant to Section 523 (a)(8) of the Bankruptcy Code. A non-dischargeable debt means that the debtor must still repay the debt even after successful Chapter 13 or 7 bankruptcy. The only exception to this iron-clad rule is if the debtor shows that repayment would “impose an undue hardship on the debtor and the debtor’s dependents.” 11 U.S.C.S. § 528 (a)(8).

A common question is whether private student loans facilitated by private lenders—such as, Sallie Mae and Chase Bank—are afforded the same non-dischargeable protections as federal and non-profit student loans. In other words, do private student loans fall under Section 523 (a)(8) of the Code and require a showing of undue hardship to discharge the student debt? This three-part blog article explores each of the three sub-sections of Section 523 (a)(8) and explains how, under certain circumstances, private student loans are also a non-dischargeable debt, absent a showing of undue hardship by the debtor.

A Quick Primer on Section 523 (a)(8) & The Undue Hardship Test

Section 523(a)(8) of the Code is titled “Exceptions from Discharge” and specifies three types of student loan debts that remain with a debtor after a successful bankruptcy case:

(A)(i) 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; or

(A) (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

Whether private or federally backed, bankruptcy courts will not discharge the debt if the student loan fits into one of the three categories described above. The only exception is if the debtor presents evidence that repaying the debt would result in an “undue hardship on the debtor and the debtor’s dependents.” 11 U.S.C.S. § 523 (a)(8) (emphasis added).

The Second Circuit Court of Appeals developed a legal standard to determine whether a debtor would suffer an undue hardship if required to repay the student debt. See Brunner v. New York State Higher Educ. Servs. Corp. 831 F.2d 395, 396 (2d Cir. 1987). The Brunner Test includes three factors, and the debtor must prove that each factor weighs in their favor. The three factors are: (1) the debtor cannot maintain, based on current income, a minimal standard of living for herself and her dependents; (2) additional circumstances exist that indicate the debtor’s current living condition will persist for a significant period of time; and (3) the debtor has made a good faith effort to repay the debt. See Brunner 831 F.2d at 396. Nearly all bankruptcy courts throughout the U.S. apply some form of the Brunner Test when confronted with a debtor that seeks to discharge student loan debt.

The Ninth Circuit Court of Appeals in United Student Aid Funds v. Pena (In re Pena), 155 F.3d 1108 (9th Cir. 1998) applied the Brunner Test and discharged the student loan debt. In In re Pena, a middle-aged married couple filed for bankruptcy relief and sought to discharge the student loan debt that the husband incurred to attend trade school. The debtors presented evidence that the husband’s certificate was useless and did not help him find better employment or increase his salary. To make matters worse, the wife suffered from depression, bipolar disorder, schizophrenia, and other mental ailments that prevented her from retaining a job for longer than six months. Further, the debtors’ age and limited education indicated that their living situation would not improve. The Ninth Circuit found that the debtors—living on a monthly income of approximately $1,700—could not maintain a “minimal standard of living.” The Circuit Court held that it would be impossible for the debtors to repay the debt without resorting to homelessness. As a result, the 9th Circuit Court found that the debtors satisfied the “undue hardship test” and discharged the student loan debt.

Bankruptcy Courts throughout the U.S. rarely discharge student loan debt unless the facts of the case are similar—or worse than—In re Pena, which has made the Brunner Test an extremely difficult standard to satisfy. Commercial lenders often argue that private student loan debts also fall under Section 523 (a)(8) of the Bankruptcy Code and, as a result, are nondischagabe absent a showing of undue hardship by the debtor.

The remaining part of this article focuses on analyzing each of the three sub-sections of 523 (a)(8) in the context of private student loan debts. The first part of this three-part article focuses on Section 523 (a)(8)(A)(i). The second and third segments discuss Section 523 (a)(8)(A)(ii) and Section 523 (a)(8)(B), respectively.

Section 523 (a)(8)(A)(i)—What does the term “program funded” mean?

Section 523 (a)(8)(A)(i) (hereinafter “AI”) is the first sub-section of Section 523 (a)(8). The text of AI states that a debt incurred by an “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 non-profit institution” is non-dischargeable.

The second use of the word “or” separates AI into two clauses. There are two notable distinctions between the two clauses. The first distinction is that the first clause is limited to “loans,” whereas “the second clause of AI concerns loan programs, [not] particular loans.” In re O’Brien 318 B.R. 258, 262 (S.D.N.Y. 2004) (emphasis added) (citations omitted). The other notable difference is that the first clause is limited to loans by a “governmental unit,” and the second clause includes governmental units and non-profit institutions.

These two distinctions indicate that private student loans are excepted from discharge under the second clause of AI (and not the first clause) if: (1) the loan was made under a “loan program” and (2) the program is “funded” by a non-profit institution. See In re Hammarstrom 95 B.R. 160, 165 (Bankr.N.D.Cal. 1989) (“[f]irst, the loan must be made pursuant to a “program” for providing educational loans. Second, that program must be “funded” at least in part by a non-profit organization”).

Bankruptcy Courts often find that the first element is satisfied if a non-profit entity is part of a program that facilitates the student loan to the debtor. For example, in Hemar Service Corp., Inc. v. Pilcher 149 B.R. 595 (Bankr.9th Cir. 1993), the debtor received student loans from a loan program funded by multiple non-profit and for-profit entities. The Bankruptcy Court found that the creditor satisfied the first element because a non-profit entity that was a member of a loan program that provided educational loans to students in need of financial assistance. See Pilcher 149 B.R. at 598. The first element is very easy to satisfy and, as a result, Bankruptcy Courts often overlook or do not analyze the first prong of the AI analysis.

Turning to the second element, the Bankruptcy Court in In re Hammarstrom held that the term “funded” means a non-profit institution that “plays any meaningful part in providing funds” to the loan program. In re Hammarstrom, 95 B.R. at 165. Bankruptcy Courts consistently rely on In re Hammarstrom because it was one of the first bankruptcy cases to define the term “funded” as used in the second clause of AI. However, Bankruptcy Courts are divided on what constitutes “funding” a loan program. Some Bankruptcy Courts have held that a non-profit institution funds a loan program when it purchases the notes made under the loan program from a private, commercial lender.

For instance, in In re Hammarstrom, the non-profit entity and a private lender entered into an agreement wherein the private lender would execute the notes with the debtors and loan money directly to the students. After the lender disbursed the loan proceeds, the non-profit entity would immediately purchase the notes from the lender and would become a creditor of the debtors. The Bankruptcy Court found that the loan program structure made the commercial lender nothing more than an agent for the non-profit entity to help it advance loans for post-secondary education. The Bankruptcy Court concluded that the non-profit entity funded the loan program because it purchased all of the notes under the program from the original lender and relieved the lender from its duties and obligations under the same.

The Court of Appeals for the Third and Eighth Circuits came to a similar conclusion but required non-profit entities to participate in the loan program. In the case of Sears v. EduCap, Inc. (In re Sears) 393 B.R. 678 (Bankr.W.D.Mo. 2008) the non-profit entity prepared the loan documents, marketed the loans, processed the loan applications, and facilitated the disbursement of proceeds from the private lender to the student. The Bankruptcy Court found that the non-profit lender funded the program because it exercised “plenary control” over the loan program and was required to purchase the loans (at one point or another), regardless of whether the loan was current or in default. See In re Sears, 393 B.R. at 681. Similarly, in Johnson v. Access Grp., Inc. (In re Johnson), Nos. 1:05-bk-00666MDF, 1:05-ap-00162, 2008 Bankr. LEXIS 3325, at *10 (Bankr. M.D. Pa. Dec. 3, 2008), the Bankruptcy Court for the District of Pennsylvania found that the non-profit institution “funded” the loan program because it (1) agreed to purchase the loan prior to the loan being made to the debtor, (2) the non-profit entity administered the program that facilitated the student loans, and (3) the non-profit entity guaranteed the loan while it was held by the private lender.

The Court of Appeals in the First, Second, Seventh, and Ninth Circuits have encountered different loan programs and, as a result, have reached different conclusions from the other Circuit Courts. The Court of Appeals in the First, Second, Seventh, and Ninth Circuits held that a non-profit entity “funds” the loan program if it guarantees the note and repays the debt to the lender upon the debtor’s default. These Circuit Courts found that without the guarantees from the non-profit entities, private lenders would not participate in the loan programs.

The Second Circuit Court of Appeals in O’Brien v. First Marblehead Educ. Res., Inc. (In re O’Brien), 419 F.3d 104 (2d Cir. 2005) specifically held that a non-profit entity was “clearly devoting some of its financial resources to supporting the program” by guaranteeing all notes made under the loan program. The Second Circuit Appellate Court was persuaded by the fact that after the debtor defaulted under the note, the non-profit entity fulfilled its obligations and immediately repaid the debt to the private lender, including all interest, fees, and costs. Bankruptcy Courts throughout the country have reached similar conclusions. See e.g., In re Duits, No. 14-05277-RLM-13, 2020 Bankr. LEXIS 138, at *5 (Bankr. S.D. Ind. Jan. 15, 2020) (“the non-profit’s guaranty helps fund a program because it encourages a lender to extend credit that may not be otherwise available”); see also Educ. Res. Inst. Inc. v. Taratuska (In re Taratuska) (D.Mass. Aug. 25, 2008, No. 07-11938-RCL) 2008 U.S.Dist.LEXIS 93206, at *18 (the non-profit funded the loan program because it guaranteed the loan, paid the loan upon default, and presented evidence that it “maintained money in segregated reserves to support its guaranteed obligations, thus devoting financial resources to the loan program”).

The cases described above signify that the term “funded” takes on many definitions, depending on the non-profit’s obligations and duties in the loan program. The Court of Appeals for the First, Second, Seventh, and Ninth Circuits found that a non-profit institution “funds” the loan program when it guarantees the loan and repays the loan proceeds to the lender upon the debtor’s default. On the other hand, a non-profit entity “funds” the loan program when it purchases the note from the lender (see e.g., In re Hammarstrom, 95 B.R. 160) and manages the loan program. See e.g., In re Sears 393 B.R. 678.

In conclusion, the case law interpreting AI illustrates that Bankruptcy Courts are willing to employ numerous definitions of the term “funded” in order to find that private student loans that are facilitated through loan programs are excepted from discharge under Section 523 (a)(8)(A)(i).

This is Part I of a three-part blog article. Part II of this three-part blog article can be accessed by clicking on this link. Part III of this blog article can be accessed by clicking on this link.