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An avenue of inquiry that is being pursued in an ongoing bankruptcy adversary proceeding might help to bring some clarity to what is the actual cost of attending a school where student loans are utilized.

The court arguments are getting into the weeds, and that’s okay. Every nook and cranny is being evaluated to reach a consensus on what the law actually says, so people eligible to discharge private student loans in bankruptcy actually get the relief the law allows.

As it stands now, even though a private student loan is included in a bankruptcy and discharge is issued, there is only muddiness if the loan is still owed. No ruling is made on the individual loans included. The Court punts and gives consumers advice that “Some Debts are not discharged,” including “debts for most student loans.” – Source

The additional advice on the form just further confuses everybody, “This information is only a general summary of the bankruptcy discharge; some exceptions exist. Because the law is complicated, you should consult an attorney to determine the exact effect of the discharge in this case.”

The Big Problem

Yes, it’s complicated. It is so complicated and confusing that many bankruptcy attorneys and courts don’t know the law’s real application.

As you can see from the many past posts on this subject, there has yet to be a homogenized understanding of what private loans are and are not actually discharged.

That leaves consumers at a mind-numbing disadvantage facing the following possibilities:

Your lawyer gave you the right advice that your private student loans were discharged.
Your lawyer gave you the wrong advice that some, all, or none are still owed.
The student loan servicer tells you student loans can’t be discharged in bankruptcy and are still due.
The student loan company accepts payments from you for loans that were actually discharged in your bankruptcy.

And that’s not all the possible answers.

Without some clarity on the accepted interpretation of the law for bankruptcy and private student loans, there is currently only one answer; you need a court opinion.

To get that opinion, the current path is for an attorney to file an Adversary Proceeding (AP) in court. This can be very expensive. It will put the facts before a Bankruptcy Judge who will make a ruling. And the rulings so far are inconsistent.

APs are regularly filed now, hoping to get some clarity.

One such case involves a student loan borrower, Robinson, and cosigner, Spears.

“Robinson is a student borrower whose consumer loans were in excess of the cost of attendance at his undergraduate and graduate schools, Butler University and Logan University. Two of these loans are and held by the Trust. Spears co-signed some of Robinson’s loans.

Robinson filed for bankruptcy in this district in 2011. He received a discharge order from this Court in July 2011. Spears also separately filed for bankruptcy in this Court in 2011. He received a discharge order from this Court in August 2011. After Robinson and Spears completed their bankruptcy actions and obtained their discharge orders, Defendants—including the Trust— knowingly sought to induce payment on their private consumer loans in violation of the statutory injunctions. These collection efforts, including those on behalf of the Trust, continue to this day.”

The Interesting Educational Expense Component

In this case, the issue appears to be that the private student loans were extended for more than the cost of actually attending the schools. The debtors claim the funds loaned by the student loan companies exceeded those allowed for qualified educational expenses at the applicable institution.

And that phrase “qualified educational expense” and “cost of attendance” are critical to determine. The answer to this question lies in legal code across different agencies, including the IRS.

According to the IRS, the cost of attendance is defined as:

(1) tuition and fees normally assessed a student carrying the same academic workload as determined by the institution … ;

(2) an allowance for books, supplies, transportation, and miscellaneous personal expenses, … as determined by the institution;

(3) an allowance (as determined by the institution) for room and board costs incurred by the student, which—
(A) shall be an allowance determined by the institution for a student without dependents residing at home with parents;
(B) for students without dependents residing in institutionally owned or operated housing, shall be a standard allowance determined by the institution based on the amount normally assessed most of its residents for room and board …

However, what if the private student loan lender is disbursing funds over the qualified educational expenses. Those should not be protected in bankruptcy. In this case all of the private student loans were discharged in bankruptcy because none of them were used for the cost of attendance.

Attorney Kaki Johnson of Smith Law Group and this firm and this one, make the argument that “Specifically, the Trust holds and accepts payments on dischargeable consumer loans made for amounts in excess of the published cost of attendance at qualified institutions, as recognized by the Department of Education pursuant to Title IV of the Higher Education Act, the Internal Revenue Code, and the Bankruptcy Code. Because these loans were made for amounts in excess of the published cost of attendance, they were neither “educational loans” nor “qualified education loans” pursuant to Section 523(a)(8) of the Bankruptcy Code. Such loans have no protection under Section 523(a)(8). They are automatically discharged upon entry of a bankruptcy court’s discharge order, and are subject to the statutory injunction prohibiting all collection efforts.”

And that is a fascinating point.

At What Point Do Private Student Loan Lenders Have to Take Responsibility?

Until this point, private student loan lenders have been overly confident that their loans are protected from bankruptcy for more than one reason.

But what if the loans are issued for demonstrably more than the “cost of attendance” at the school the student is attending. The cost of attendance can be determined and calculated from published data. But who is checking this information at the lenders?

Schools that are eligible for federal student loan funding must report the cost of attendance as a defined value to the Department of Education. That information is available online here on the Integrated Postsecondary Education Data System.

For example, North Carolina State University at Raleigh expense data can be viewed here.

As this AP says, “if an educational loan exceeds the published “cost of attendance” or, alternatively, is within the “cost of attendance” but exceeds the “qualified higher education expenses” – e.g., because the amount is greater than the cost of attendance reduced by a scholarship received) – the loan is not “solely for qualified higher education expenses” and hence it is not a “qualified education loan.” Such a loan (exceeding either the “cost of attendance” or the “qualified higher education expenses”) is not excepted from discharge under Section 523(a)(8)(B). Plaintiffs’ Loans held by the Trust either exceeded both the “qualified higher education expenses” and the “cost of attendance” or solely the “qualified higher education expenses.”

This issue about the Cost of Attendance is one I’ve been talking about for at least since 2013.

Yet bankruptcy attorneys, courts, private student loan creditors, and private student loan servicers have been sweeping this inconvenient truth under the rug. Primarily because they have been struggling to understand the finer points of this issue.

I would imagine there are tens of thousands of Chapter 7 and Chapter 13 bankruptcies where people are still making payments on all or some of their private student loans when they were technically discharged in their bankruptcy.

The attorneys representing the student loan borrower and cosigner make an interesting statement. They say, “Unlike the cases cited by the Trust where the debtor’s argument hinged solely on the assertion that the loan was not used for educational expenses, Plaintiffs argue that the Loans held by the Trust exceeded the cost of attendance or the qualified higher education expenses and therefore cannot be considered qualified education loans under Section 523(a)(8)(B).

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Consequently, the Trust’s only recourse is to affirmatively demonstrate through the course of these proceedings that, for each Loan, after considering all certified loans, financial assistance and scholarships, and any loans made before the Trust’s Loans, the Trust’s Loans do not exceed the qualified higher education expenses.”

In this case, the lenders came up with their own set of facts regarding the debtor’s cost to go to school rather than use the government data on the National Center for Education Studies (NCES) website.

The role of NCES “is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations. NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES fulfills a Congressional mandate to collect, collate, analyze, and report complete statistics on the condition of American education.” – Source

It would appear NCES is the definitive resource for the cost of attendance data and not some brochure put out by the school that the lenders want to use.

So It’s Tough to Make Any Assumptions

Hopefully, you can see how it can be very tough to get any competent answer about if your private student loans can be or were discharged in bankruptcy. From the bankruptcy attorney to the court, to the lender, this is tough stuff.

If you are looking for the best resource in the United States to try and get an answer to these issues, the Smith Law Group in New York is the leader in this field when it comes to representing consumers.