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Private Student Loan Debt and the Exception to Discharge As Viewed Through the Eyes of the Circuit Courts
Sections 727 and 1328 of the Bankruptcy Code operate as a permanent injunction against creditors seeking to collect against debts that have been discharged in bankruptcy. Not all debts, however, are dischargeable. Section 523(a) of the Bankruptcy Code enumerates 19 exceptions of debts from the discharge granted to an individual debtor. One such exception is contained in subsection 523(a)(8)(A)(ii). In relevant part, subsection 523(a)(8)(A)(ii) of the Bankruptcy Code provides that "a discharge under section 727 … or 1328(b) … does not discharge an individual from any debt … for — an obligation to repay funds received as an educational benefit …." Subsection 523(a)(8)(A)(ii) of the Bankruptcy Code does not automatically operate to except from discharge certain private student loans.
Three Circuit Courts have examined the question of whether private educational loans constitute "an obligation to repay funds received as an educational benefit" within the meaning of subsection 523(a)(8)(A)(ii). Each of these Circuit Courts applied similar analyses to answer this question in the negative. See, Homaidan v. Sallie Mae, Inc., 3 F.4th 595 (2d Cir. 2021); McDaniel v. Navient Sols., LLC (In re McDaniel), 973 F.3d 1083 (10th Cir. 2020); Crocker v. Navient Sols., LLC (In re Crocker), 941 F.3d 206 (5th Cir. 2019).
The first part of this article examines the relevant legislative history of section 523(a)(8) of the Bankruptcy Code, focusing on the genesis of the student loan exception to discharge. The next part of the article discusses judicial interpretations of, and interplay between, the words "loan" and "educational benefit." The article concludes with a summary of the factors that courts have considered and will likely continue to consider when addressing dischargeability of private student loans under subsection 523(a)(8)(A)(ii) of the Bankruptcy Code and a cautionary word for practitioners considering whether to put forth an argument to the contrary.
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