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).