student loan cancellation
A new court ruling says that private student loans can be discharged in bankruptcy.
Here’s what you need to know — and what it means for your student loans.
Student Loans
The U.S. Court of Appeals for the Second Circuit ruled in favor of a student loan borrower who sought student loan cancellation for his private student loans. Here’s what happened.
Student loan cancellaton: bankruptcy
Plaintiff Hilal K. Homaidan borrowed student loans from Sallie Mae (Navient became the successor to those student loans) to attend Emerson College in Boston. The student loans were two Tuition Answer Loans, which totalled $12,567. The plaintiff said these student loans were not used to pay Emerson’s cost of attendance and went directly to his bank account. After graduating, Homaidan filed for Chapter 7 bankruptcy to discharge his student loans. The bankruptcy court granted discharge but wasn’t clear in its decision whether private student loans would be cancelled too. Navient, the lender, proceeded to collect payment of the private student loans from Homaidan, the borrower. Homaidan agreed to pay off the private student loan under a mistaken belief that these student loans weren’t included in the discharge order. However, after paying off the private student loans in full, Homaidan reopened his bankruptcy case to argue that the private student loans he mistakenly paid were discharged in bankruptcy.
Cancel student loans: what the court said
Here’s what the court found:
- Navient argued that Congress sought to exclude from student loan discharge all private student loans.
- Absent a showing of “undue hardship,” three types of student loans can’t be discharged in bankruptcy: (1) loans and benefit overpayments backed by the government or a nonprofit; (2) obligations to repay funds received as an educational benefit, scholarship, or stipend; and (3) qualified private educational loans.
- The sole question is whether the student loans constitute “an obligation to repay funds received as an educational benefit,” since Navient didn’t argue that the student loan fell in either the first or third categories.
- The court embarked on an analysis of stautory interpretation of the U.S. Bankruptcy Code to determine the underlying meaning of the operative words in the text.
- The term “educational benefit” is “undefined and potentially vague.” The court concluded that the terms should be interpreted in light of its “listed companions,” suggesting “educational benefits” means conditional grant payments similar to scholarships and stipends. Since scholarships and stipends generally don’t have to be repaid, the plaintiff in this case isn’t required to pay these private student loans.
What this means for your student loans
This case is a win for student loan borrowers. As a result, it may be easier for more student loan borrowers to discharge private student loans in bankruptcy. Generally, unlike mortgages or credit card debt, it’s difficult to discharge student loans in bankruptcy unless you can demonstrate an “undue hardship.” If Congress doesn’t cancel student loans, it’s possible that some student loan borrowers who are struggling financially may pursue student loan discharge through the bankruptcy process as a last resort. There is some bipartisan support for amending the U.S. Bankruptcy Code to make it easier for student loan borrowers to get student loan cancellation in bankruptcy. To date, that hasn’t happened. However, if there is no wide-scale student loan cancellation, Congress could act on student loans and bankruptcy.
If you have student loans, make sure you understand all your options for student loan repayment. Here are some smart places to start to save money:
