What You Need to Know About Educational Benefit to Get Your Some or All of Your Student Loans Discharged in Bankruptcy

Well Jason Iuliano has done it again and published another paper which will help to change the course of dealing with student loans and bankruptcy.

Iuliano’s information is of most importance to those attempting to seek a discharge of student loan debt that is not protected in bankruptcy. You can see this post for more on why not all loans are protected.

Iuliano says, “Student loans hold a special status in the Bankruptcy Code. Unlike any other consumer debt, they are not dischargeable through the normal bankruptcy process. Specifically, for any student loan that satisfies one of three statutory criteria, a court may only grant a discharge if the borrower proves “undue hardship.” This requirement presents a significant hurdle that discourages the vast majority of bankrupt debtors from ever pursuing a student loan discharge.

Given the high deterrent effect of the undue hardship standard, it is, therefore, imperative that courts accurately determine which educational debts are nondischargeable.

In this Article, I argue that bankruptcy courts have misinterpreted the statutory criteria. The ultimate consequence of this judicial error has been to misclassify billions of dollars of student loan debt and to prevent many borrowers from obtaining the bankruptcy relief to which they are entitled.

One phrase, in particular, has been the source of this problem: “educational benefit.” In their rulings, judges have held that this term includes any debt used for educational purposes. Under any of the prevailing interpretive frameworks, however, that reading is indefensible.

The statutory text, legislative history, and policy considerations all indicate that the phrase educational benefit can only be read to refer to a narrow type of debt—namely, conditional educational grants. If courts adopt the interpretation set forth in this Article, they will not only be expressing fidelity to the statute and to congressional intent but also will be acting to provide financial relief to many debtors who have been hit hardest by the student loan crisis.”

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Iuliano targets the muddy issue of the term “educational benefit” used in the law to limit some student loans from discharge in bankruptcy. But as he notes, the definition of this critical term put forward most often is not by the consumer, but by the lenders fighting the discharge.

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This has resulted in an accepted broad reading of the terms and misapplication under the law.

The broad reading of the term “educational benefit” is considered to be any loan used for any educational purpose.

As Iuliano says, “By adopting this broad reading, courts have done much to prevent honest debtors from utilizing the protections of bankruptcy. All manner of student loans which should have been discharged—such as loans for unaccredited schools, loans for tutoring services, and loans beyond the cost of attendance for college—have been swept up in this interpretation. The magnitude of this problem is, in fact, rather large and has led billions of dollars of student loan debt to be misclassified as nondischargeable.”

A key point in the argument if an educational benefit is just simply a loan is dealt with by Iuliano. He makes an excellent point, “The key question, then, is as follows: if Congress meant “loan,” why did it not simply say “loan” rather than enact the clunky circumlocution “obligation to repay funds received.” After all, Congress used the word “loan” three times in section 523(a), so this is not an instance of ignorance. To the contrary, the evidence suggests that Congress’ choice to forego the term “loan” in this portion of the statute represented a considered decision. Therefore, if we are to take the Supreme Court’s interpretative principle seriously, there is no option but to conclude that “obligation to repay funds received” refers to something other than a loan. Recently, a small number of courts have endorsed precisely this argument.”

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Hopefully, attorneys will read and start to force this narrow reading of the bankruptcy elimination of some student loan debts.

We need more courts to rule and set a path for this effort to travel down.

I invite you to read the full paper Student Loan Bankruptcy and the Meaning of Educational Benefit.

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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