Judge Drills Down on Tuition Payments in Parents’ Bankruptcy

A judge who’s weighing whether Johnson & Wales University needs to return tuition money following the bankruptcy filing by a former student’s parents wants to know who exactly paid the tuition, the parents or the government.

In a recent court hearing, Judge Julie Manning of the U.S. Bankruptcy Court in New Haven, Conn., requested that lawyers file more documents in the lawsuit that followed last year’s bankruptcy filing by Robert and Jean DeMauro. In the suit, a bankruptcy trustee argued that tuition payments to the private Rhode Island university should be clawed back because the couple didn’t benefit from making the payments—their daughter did.

The tuition money didn’t come from the DeMauros’ pockets but rather from the U.S. Department of Education’s Parent PLUS loan program, which is available for undergraduate student who have maxed out borrowing on other federal loans. As of July 1, 3.1 million parents owed a combined $68 billion under the federal government’s Parent PLUS loan program, Education Department figures show.

According to a recording of the Sept. 16 hearing, Judge Manning questioned the bankruptcy trustee’s attempt to take back the money by asking: “How is it the debtor’s property then if it’s made by a third party?”

Trustee attorney Jeffrey Hellman said the answer can be found in the fine print of the Parent PLUS loan documents, which name Mr. DeMauro as the only person responsible for payment (i.e. the obligor).

“If it’s not the debtor’s property, how could they be liable to pay it?” Mr. Hellman said. He later told Bankruptcy Beat that the situation is similar to when a person buys a car using a loan, and the lender sends the check directly to the car dealer.

Judge Manning set a Dec. 2 hearing to revisit the lawsuit.

This isn’t the first time bankruptcy trustees have battled against colleges over money from a loan that legally links parents to their children’s student-loan debt. In 2010, Marquette University unsuccessfully fought to avoid surrendering $21,500 to the bankruptcy estate of Carmen and William Leonard, who cosigned a loan for their son.

Tuition-recovery lawsuits are a new phenomenon, as The Wall Street Journal has reported. Historically, tuition payments were so small that a court-appointed trustee wouldn’t waste time pursuing them. But as college costs rise and more parents chip in to help their kids, bankruptcy experts predict more of these lawsuits to come.

In response to the lawsuits, Rep. Chris Collins (R., N.Y.) introduced a bill that would block bankruptcy trustees from filing lawsuits against universities and college students to recover tuition money that had been paid years before. The bill, introduced in May, has three cosponsors.

-Josh Mitchell contributed to this article.

Write to Katy Stech at [email protected]. Follow her on Twitter at @KatyStech