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

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.”