In my recent article and research on the discharge of Sallie Mae and private student loans, here, I discovered there is a special subset of private student loans that can be easily discharged in a consumer bankruptcy filing.
Update December 29, 2017 – Also be sure to read Here is Why Your Private Student Loan May Able to Be Eliminated in Bankruptcy for even more information on this subject.
In fact, not only can they be discharged but when they are pointed out as meeting the criteria you will read about below they appear to be discharged without objection of the lender. In general they were disposed of with just a small amount of bankruptcy paper shuffling in an adversary proceeding.
The private loans in this special subset of easily dischargeable private student loans are for schools or education that was obtained at an ineligible education institution. The definition of which is important.
Now it might take a bit of reading here to become familiar with the exact type of private student loans I’ve found that are able to be easily eliminated but if you stick with this article, by the end you will have a much better understanding if you can eliminate all or part of your private student loans in a bankruptcy filing.
Here are two total student loan debt discharge examples that demonstrate what I am describing.
3:12-ap-03159 – Adams
Plaintiff/debtor listed a disputed debt to defendant Sallie Mae, Inc. on Schedule F with account number [ ] in the amount of $29,774.00, and another loan with account number [ ] (believed to be the same account, under an abbreviated number).
The loan(s) alleged in Paragraph 4 were to Desert Sun Helicopter Academy, which is not an eligible education institution within the meaning of 26 USC 221(d)(1) and (2). Sallie Mae, Inc. has claimed in correspondence with debtor/plaintiff that the student loans described in Paragraph 4 are not dischargeable. The fact that the student loans in question were not to an “eligible education institution” under 26 USC 221(d)(1) and (2) means that the debts are not “qualified education loan(s)” under 11 USC 523(a)(8)(B), and therefore are dischargeable.
- Sallie Mae loan is fully discharged. – Source
3:12-ap-03171 – Davidson
This loan was incurred to pay tuition and expenses for the Debtor’s participation in Co-Active
Coach Training Program and Co-Active Leader Program at the Coaches Training Institute (hereinafter “CTI”).
After completing CTI’s Co-Active Coach Training Program Debtor had her doubts about the quality of the program because a large portion of each seminar was devoted to selling the “students” attending the “class” on purchasing additional classes from the “school”, which is how Debtor ended up purchasing her second program from CTI, the Co-Active Leader Program.
Debtor’s participation in the program was officially terminated on or about February 27, 2009, and confirmed in writing by a letter to CTI.
Defendant’s Claim Does Not Meet Definition for Exemption Under §523(a)(8)
Despite having paid $941.26 in interest on the Defendant’s loans in 2009, $769.20 in 2010, and $1084.84 in 2011. Defendant’s loan servicer has informed Debtor that her loans were “ineligible for a tax deduction” see EXHIBIT A, attached hereto.
Upon further investigation by Debtor’s attorney, Debtor does not believe her loan to the Defendant meets requirements for the exemption from discharge provided under §523(a)(8) of the Bankruptcy Code.
Specifically, Debtor does not believe that her loan meets the definitional requirements for exemption because she does not believe the loan was made for “qualified higher education expenses”, that CTI was an “eligible educational institution,” and does not believe that she was an “eligible student” as those terms are defined by 26 USC 221(d) which is referred in §523(a)(8)(B) for the discharge of “qualified educational loans.” – Source
- Sallie Mae loan is fully discharged in bankruptcy. – Source
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Not All Student Loans are Alike
Granted, it is more difficult to discharge student loans in bankruptcy. But loans which were used for training or some types of education at organizations that were not eligible financial institutions may not be classified as student loans in a bankruptcy filing.
For a loan to be qualified as a “student loan” it must:
For a loan to fall with this section, (1) it must have been made under a government or nonprofit student loan program, or (2) it must be a qualified educational loan under section 221(d)(1) of the Internal Revenue Code, for attending an eligible education institution as defined in section 221(d)(2) of the Internal Revenue Code, and incurred for costs of attendance as defined in section 472 of the Higher Education Act.
As bankruptcy attorney Craig Andresen says, “For example, perhaps you were not an “eligible student” at the time the private student loan was made to you; or maybe the loan was not incurred to pay “qualified education expenses”; or perhaps the loan was not for attendance at an “eligible education institution” because the school was not accredited under Title IV of the Higher Education Act. All these are requirements imposed by section 221(d) of the Internal Revenue Code. Failure of a private student loan to meet any of these criteria means that the loan is fully dischargeable, because it would not qualify under section 523(a)(8) of the bankruptcy law.” – Source
What These Dischargeable Loans Look Like
Let’s look at those section that describe what an “eligible education institution” or “qualified education loan” really is.
According to this bankruptcy code section the loan may not be automatically discharged:
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for–
(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend;
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;
221(d)(1) & (2)
Let’s look first at what section 221(d)(1) says:
For purposes of this section—
(1) Qualified education loan
The term “qualified education loan” means any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses—
(A) which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,
(B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and
(C) which are attributable to education furnished during a period during which the recipient was an eligible student.
Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. The term “qualified education loan” shall not include any indebtedness owed to a person who is related (within the meaning of section 267 (b) or 707 (b)(1)) to the taxpayer or to any person by reason of a loan under any qualified employer plan (as defined in section 72 (p)(4)) or under any contract referred to in section 72 (p)(5).
Section 221(d)(2) says:
2) Qualified higher education expenses
The term “qualified higher education expenses” means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997) at an eligible educational institution, reduced by the sum of—
(A) the amount excluded from gross income under section 127, 135, 529, or 530 by reason of such expenses, and
(B) the amount of any scholarship, allowance, or payment described in section 25A (g)(2).
For purposes of the preceding sentence, the term “eligible educational institution” has the same meaning given such term by section 25A (f)(2), except that such term shall also include an institution conducting an internship or residency program leading to a degree or certificate awarded by an institution of higher education, a hospital, or a health care facility which offers postgraduate training.
25A (f)(2) says the school must also be “eligible to participate in a program under title IV” of Higher Education Act of 1965. This means if your school does not offer Title IV federal loans, even though they are accredited, the loans may be eligible for discharge.
These loans include:
- Federal Family Education Loan (FFEL)
- Direct Loan
- Federal Perkins Loan
I Know This is Boring But Keep Going
According to the code, schools that are able to be discharged DO NOT meet the following criteria in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll
(a) Institution of higher education
For purposes of this chapter, other than subchapter IV, the term “institution of higher education” means an educational institution in any State that—
(1) admits as regular students only persons having a certificate of graduation from a school providing secondary education, or the recognized equivalent of such a certificate, or persons who meet the requirements of section 1091 (d) of this title;
(2) is legally authorized within such State to provide a program of education beyond secondary education;
(3) provides an educational program for which the institution awards a bachelor’s degree or provides not less than a 2-year program that is acceptable for full credit toward such a degree, or awards a degree that is acceptable for admission to a graduate or professional degree program, subject to review and approval by the Secretary;
(4) is a public or other nonprofit institution; and
(5) is accredited by a nationally recognized accrediting agency or association, or if not so accredited, is an institution that has been granted preaccreditation status by such an agency or association that has been recognized by the Secretary for the granting of preaccreditation status, and the Secretary has determined that there is satisfactory assurance that the institution will meet the accreditation standards of such an agency or association within a reasonable time.
(b) Additional institutions included
For purposes of this chapter, other than subchapter IV, the term “institution of higher education” also includes—
(1) any school that provides not less than a 1-year program of training to prepare students for gainful employment in a recognized occupation and that meets the provision of paragraphs (1), (2), (4), and (5) of subsection (a) of this section; and
(2) a public or nonprofit private educational institution in any State that, in lieu of the requirement in subsection (a)(1), admits as regular students individuals—
(A) who are beyond the age of compulsory school attendance in the State in which the institution is located; or
(B) who will be dually or concurrently enrolled in the institution and a secondary school.
For purposes of this section and section 1002 of this title, the Secretary shall publish a list of nationally recognized accrediting agencies or associations that the Secretary determines, pursuant to subpart 2 of part G of subchapter IV of this chapter, to be reliable authority as to the quality of the education or training offered.
To make things easier, The Department of Education maintains a list of institutions online which you can search. Search Here
But remember the point I made about the school also has to offer Title IV loans as well. Just because the school is on the list above is not the only factor that makes your student loans, protected.
This would be the first place to look to see if the school you attended is on the list. In the examples I provided earlier, neither training provider is found by searching.
If the school you attended IS NOT found by searching the list above then that would be an initial clue your private students may be fully dischargeable. You should discuss this with your bankruptcy attorney.
You can click here to find a local bankruptcy attorney and talk to them for free about your specific situation.
Just Because a School Offers Loans They May Still be Discharged
Here is an example of a school which is offering Sallie Mae SLM Financial loans to pay for flight training. Silverhawk Aviation Academy says, “Silverhawk Aviation Academy is one of only a handful of helicopter schools who is very fortunate to be able to continue to offer SLM Financing to our qualified students for their flight training loans.
The Sallie Mae Smart Option Student Loan® is an ideal solution for students who still need funds after they have maximized free money and federal loans. With this loan, students can borrow up to the full cost of their education, less other aid received.” – Source
As of the publication of this article Silverhawk Aviation Academy is not on the list of accredited schools from the Department of Education.
Or how about TekSeekers IT Training. This company says students can apply for a technology training loan through Sallie Mae SLM Financing but they are not on the list either. – Source
To confirm my findings I went and looked at loans included in 2011 bankruptcy filings for SLM Financial and sure enough, more discharges were granted for non-eligible institutions.
The loans alleged in Paragraph 4 were to “WINGS/CASCADES-SPIRIT FLT”, with Sallie Mae School Code 6012170000. This flight school is not (and was not at the time of the loan) an eligible education institution within the meaning of 26 USC 221(d)(1) and (2). The fact that the student loan in question was not to an “eligible education institution” under 26 USC 221(d)(1) and (2) means that the debt is not “qualified education loan(s)” under 11 USC 523(a)(8)(B), and therefore is dischargeable. – Source [The school was “Wings of the Cascades Spirit Flight”]
- Plaintiffs are indebted to Sallie Mae pursuant to the applicable terms of one (1) Career Training Loan Promissory Note (“Promissory Note”), disbursed on January 3, 2007. As of October 11, 2011, there was a balance due and owing under the Promissory Note, including principal, interest and fees, in the amount of $42,693.09.
- Plaintiffs’ liability on the debt owed to Sallie Mae, arising from the Promissory Note referenced herein above, is hereby rendered dischargeable upon the grant of a general discharge in the Plaintiffs’ main bankruptcy case. – Source
But Don’t Lose Hope Yet
If your school is on the list some of your private student loans may still be discharged if they were used for expenses that were not “qualified higher education expenses.” That part of the student loan may and should be discharged.
A qualified higher education expense is defined as:
(3) Qualified higher education expenses
(A) In general
The term “qualified higher education expenses” means—
(i) tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution;
(ii) expenses for special needs services in the case of a special needs beneficiary which are incurred in connection with such enrollment or attendance 
(iii) expenses paid or incurred in 2009 or 2010 for the purchase of any computer technology or equipment (as defined in section 170 (e)(6)(F)(i)) or Internet access and related services, if such technology, equipment, or services are to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is enrolled at an eligible educational institution. Clause (iii) shall not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature.
(B) Room and board included for students who are at least half-time
(i) In general In the case of an individual who is an eligible student (as defined in section 25A (b)(3)) for any academic period, such term shall also include reasonable costs for such period (as determined under the qualified tuition program) incurred by the designated beneficiary for room and board while attending such institution. For purposes of subsection (b)(6), a designated beneficiary shall be treated as meeting the requirements of this clause.
(ii) Limitation The amount treated as qualified higher education expenses by reason of clause (i) shall not exceed—
(I) the allowance (applicable to the student) for room and board included in the cost of attendance (as defined in section 472 of the Higher Education Act of 1965 (20 U.S.C. 1087ll), as in effect on the date of the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001) as determined by the eligible educational institution for such period, or
(II) if greater, the actual invoice amount the student residing in housing owned or operated by the eligible educational institution is charged by such institution for room and board costs for such period. – Source
So as an example, if you attended a qualified educational institution but were not at least half-time it appears an argument could be made to discharge room and board expenses. Or if you used part of your student loan for living expenses outside of room and board, those may be be eligible for discharge as well.
This would also apply to money paid from student loans for:
- Discretionary college costs, like those associated with intramural sports teams or sororities and fraternities
- Transportation expenses, such as gas for those who commute to school or airfare to fly home for the holidays.
- A laptop or computer isn’t considered a qualified education expense unless it is required by the college or for a course.
- Dorm room supplies like the bed sheets and a mini-fridge, don’t qualify, unless they’re charged to the student by the university.
- Off-campus housing (rent and food) that exceeds the estimated off-campus expenses published by the university.
- Textbooks are qualified education expenses, but a study guide not included on the required course list may not be.
- Furnishing an apartment is not part of room and board.
- SAT or ACT testing.
- School sponsored travel.
- Internet access not billed through the school.
- Workshops at school if not enrolled.
The list above are examples but it is certainly not exhaustive. You would need to evaluate what you specifically spent your student loan on.
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Don’t Assume Your Private Student Loan is Not Dischargeable
It would be a complete mistake to not assume part or all of any private student loan is not dischargeable or allowed to be eliminated in a bankruptcy filing.
This is an emerging area and there are frankly not that many people familiar with this topic. The general assumption is that private student loans are not dischargeable in bankruptcy and that would be both factually and practically wrong. As I’ve demonstrated to you, some can be.
I highly recommend anyone who is interested in this topic should read the paper by Mark Kantrowitz, here.
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