A Tenth Circuit ruling that some types of private student loan debts can be wiped out in bankruptcy could broaden options for struggling debtors and prompt re-opening of some old bankruptcy cases.
The U.S. Court of Appeals for the Tenth Circuit held Monday that Section 523(a)(8)(A)(ii) of the Bankruptcy Code— which prevents debtors from eliminating “an obligation to repay funds received as an education benefit” absent undue hardship—doesn’t refer to student loans. The provision refers to benefits like scholarships or stipends that have to be repaid only if the recipient fails to satisfy a requirement associated with the benefit, the court said.
Navient Solutions LLC, one of the largest private student loan lenders, sought a ruling that it can rely on the provision to have its loans declared non-dischargeable. The appellate court said certain private student loans can be discharged.
The ruling applies only to loans that are issued by private lenders for certain non-accredited schools, as well as private-lender issued loans that exceed the cost of attendance, said Jason Iuliano, a law professor at Villanova University whose research focuses on student loan debt and bankruptcy.
The decision doesn’t apply to government-backed loans or other “qualified” student loans, which make up the vast majority of typical student loans. The ruling’s limitations mean that most Americans holding $1.5 trillion in student loans will continue to face high hurdles to getting their debt cleared in bankruptcy. Qualified education loans, as defined in the International Revenue Code, can be used solely to cover the cost of attendance such as tuition or board.
Still, the ruling is “good news for a small chunk of people,” said Edward Boltz, a consumer bankruptcy attorney and vice president of the National Association of Consumer Bankruptcy Attorneys. Debtors who completed bankruptcy but still have some private student loan debt could rely on the decision to re-open their cases and try to get that debt discharged, he said.
The appeals court decision likely comes as bad news for the private lenders of non-qualified student loans that have argued that their loans can’t be discharged in bankruptcy, said John Rao, an attorney with the National Consumer Law Center.
The Tenth Circuit’s decision stems from an appeal by debtors, Byron and Laura McDaniel, who claimed that they discharged some private student loans in a Chapter 13 bankruptcy. Navient Solutions, the loans’ creditor, said the loans were exempt from discharge under the Bankruptcy Code section.
Navient didn’t respond to requests for comment.
According to the most recent figures from Navient, 92% of outstanding student loans are owned or guaranteed by the federal government, while just 8% are private.
The ruling from the Tenth Circuit will force bankruptcy courts there to look more closely at student loan debt, said attorney Austin Smith of the Smith Law Group LLP, who represented the McDaniels.
It could lead to “a massive reexamination by the lower courts” about what a student loan is and whether the statute applies, Smith said.
Many debtors assume they hold government-backed loans, but Navient services both government and private loans, Smith said. Sometimes debtors have both and they don’t realize it, Smith said. “A lot of people are going to discover that what they thought was a federal student loan is a private loan,” Smith said.
Less than 0.1%
Less than 0.1% of debtors who file for bankruptcy attempt to discharge student loan debt, according to Villanova’s Iuliano. Between 2011 and 2019, more than 200,000 bankruptcy filers said annually that they had student loan debt, yet only 500 to 600 tried each year to get rid of any of that debt through an adversary proceeding, his research found.
The court’s ruling will now allow debtors in the Tenth Circuit to discharge a small slice of those loans automatically, without having to prove undue hardship or file an adversary proceeding, Iuliano said.
The ruling is especially impactful for students who took out private loans to attend non-accredited institutions, Iuliano said. Those students are often less well off financially and find it harder than accredited institution graduates to land good jobs. That means they are more likely to declare bankruptcy, Iuliano said.
The ruling immediately applies to a few billion dollars worth of debt in the Tenth Circuit and could affect tens of billions of debt if applied nationwide, Iuliano said.
The Tenth Circuit’s decision echoes a similar ruling from the Fifth Circuit, said Robert Lawless, a professor at the University of Illinois College of Law who specializes in bankruptcy and consumer finance. Both rulings cover private student loans and not qualified education loans, which are still clearly nondischargeable under Section 523(a)(8)(B), he said.