The underutilized student loan bankruptcy discharge

A common misconception is that student loans are never dischargeable in bankruptcy. There is a bankruptcy discharge exception for some qualified student loans and educational benefit repayment obligations. The discharge exception does not, however, apply to all loans made to students. Jason Iuliano argues in a new paper that bankruptcy courts have interpreted the discharge exception too broadly, applying it to loans for unaccredited schools, loans for tutoring services, and loans beyond the cost of attendance for college. His paper presents a compelling argument based on the plain language of the statute, the legislative history and policy in support of a narrow reading of 11 USC §523(a)(8).

The Bankruptcy Court for the Southern District of Texas recently adopted the narrow reading of §523(a)(8)(A)(ii) in Crocker v. Navient Solutions, LLC , Adv. 16-3175 (Bankr. S.D. Tx Mar. 26, 2018). The court denied Navient's motion for summary judgment, finding that the bar exam study loan from SLMA at issue was not within the discharge exception for qualified student loans or educational benefit repayments.

In another class action complaint filed last year against Sallie Mae and Navient, plaintiffs claim that servicers are systematically defrauding student loan debtors about their bankruptcy discharge rights. According to the complaint in Homaidan v. Sallie Mae, Inc. (17-ap-01085 Bankr. EDNY), servicers illegally continued collecting private student loans that were fully discharged in debtor bankruptcies because they were not qualified educational loans. The servicers exploited the common misconception that "student loans" writ large are excluded from bankruptcy discharge. The defendants' motion to dismiss or compel arbitration is pending.

Professor Iuliano has also demonstrated in a prior paper that the even student loans covered by the bankruptcy discharge exception can still be discharged based on showing "undue hardship," and that courts are far more likely to approve undue hardship discharges than many debtors (and lawyers) may realize.