Navient Private Student Loan Bankruptcy Update July 16, 2021

In a case I wrote about before, the United States Court of Appeals for the Second Circuit rules Navient Tuition Answer loans are not protected in bankruptcy and can be discharged.

“Soon after graduating, Homaidan filed for Chapter 7 bankruptcy in the United States Bankruptcy Court for the Eastern District of New York. The petition listed the Navient loans as liabilities. Homaidan eventually obtained a discharge order from the bankruptcy court, but the order did not specify which debts were discharged. Rather, it observed that some “common types of debts” including “[d]ebts for most student loans,” are not dischargeable in a Chapter 7 proceeding. App’x 59 (alterations omitted).

After the bankruptcy proceeding was closed, Navient hired a collection firm to pester Homaidan about paying back his Tuition Answer Loans. These demands for repayment caused Homaidan to assume that the loans had not been discharged; so he paid Navient in full, allegedly “under the mistaken belief that he had a legal obligation to do so.” App’x at 26 (Compl. ¶ 51).

In 2017, Homaidan moved to reopen his bankruptcy case to seek a determination that the Navient loans were in fact discharged during the original proceeding. (This would allow him to sue Navient for violating the discharge order.) Once the case was reopened, Homaidan commenced the instant adversary proceeding against Navient, which is styled as a putative class action. According to Homaidan, Navient has employed a scheme of issuing dischargeable loans to unsophisticated student borrowers and then demanding repayment even after those loans are discharged in bankruptcy.”

Original Post

I was recently working on an article about private student loans that sure look like they should have been discharged in the student’s bankruptcy filing. It looks as if the loans were issued for a course of study that is not certified for Title IV funding. I know that sounds like a technical statement but keep reading.

Whether an educational institution is Title IV approved under the Higher Education Act is important because if the schools are not Title IV schools, the student loans would not be protected by bankruptcy and should have been instantly discharged.

If you want to read more about this, see this article.

So the whole Title IV issue is critically material to this situation. A qualified educational loan protected in bankruptcy is defined as a loan for a school eligible to participate in government Title IV programs.

Loans for schools that are not “eligible education institutions” do not receive bankruptcy protection.

According to 26 U.S. Code § 25A”

(2) Eligible educational institution The term “eligible educational institution” means an institution—

(A) which is described in section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088), as in effect on the date of the enactment of this section, and

(B) which is eligible to participate in a program under title IV of such Act.

If you want to spend more time following the path on how to get to this critical section, you might want to read this post and this one by bankruptcy attorneys.

I’ve previously reported on student loans that were discharged using this logic. See this article. And those example loans were Sallie Mae student loans that were fully discharged in additional court proceedings.

A big hat tip is owed to bankruptcy attorney Chad Van Horn for mentioning a Sallie Mae document which, in my opinion, blows this whole thing wide open.

On January 12, 2016, Navient Funding filed a document with the Securities and Exchange Commission that contained some very interesting information regarding loans made by Sallie Mae and others. These are Sallie Mae loans that Navient Solutions is listed as the “Sponsor, Servicer, and Administrator.”

Buried in this 361-page, really boring document are the following sections:

“In addition to federal loan programs, which have statutory limits on annual and total borrowing, Navient Solutions and its affiliates (prior to their separation from Sallie Mae Bank) sponsored a variety of private education loan programs and purchased loans made under such programs to bridge the gap between the cost of education and a student’s resources. Navient and its subsidiaries (including Sallie Mae Bank when it was a part of Legacy SLM) originated such private education loans which are not federally guaranteed. Most of these higher education private education loans were made in conjunction with a FFELP Stafford loan, in which case they were marketed to schools through the same marketing channels as FFELP loans by the same sales force. In 2004, Navient Solutions expanded its direct-to-consumer loan marketing channel with its Tuition Answer(SM) loan program where Navient Solutions’ affiliates originated and purchased loans outside of the traditional financial aid process. Navient Solutions’ affiliates also originated and purchased alternative private education loans, which are marketed by a subsidiary of Navient to technical and trade schools, tutorial and learning centers, and private kindergarten through secondary education schools. These loans were primarily made at schools not eligible for Title IV loans.”

Keep that “not federally guaranteed” statement in mind as you keep reading.

Here is another section that opens things up some more.

“Private Education Loans. In addition to the FFELP loans originated under the Higher Education Act, the sellers and other affiliates of Navient have developed student loan programs that are not federally guaranteed for undergraduate students and/or their parents (“Private Undergraduate Loans”), graduate students (“Private Graduate Loans”), private credit consolidation programs (“Private Consolidation Loans”), programs marketed directly to consumers (“Direct-to-Consumer Loans”), programs for students and/or their parents at technical and trade schools, tutorial and learning centers, and private kindergarten through secondary education schools (“Career Training Loans”) and programs that provide private supplemental funding for certificate-seeking, continuing education, undergraduate and graduate students at eligible degree-granting institutions or non-degree granting institutions (“Smart Option Student Loans”), which can be used by borrowers to supplement their FFELP loans in situations where the FFELP loans do not cover the cost of education or to cover education at non-Title IV institutions and programs for undergraduate, graduate and health professional students (“EFG Loans”), that provide borrowers with private supplemental funding. We sometimes refer to all such loans as private education loans in this prospectus. Private Undergraduate Loans and some Private Graduate Loans (“Undergraduate and Graduate Loans”) are marketed as Signature Select Loans®, College Advantage Loan and Signature Student Loans® (collectively, the “Signature Student Loans®”), EXCEL®, Student EXCEL®, EXCEL Select, EXCEL Custom®, EXCEL Education Loan(SM), EXCEL Grad Loan(SM), EXCEL Preferred®, GRADEXCEL®, GradEXCEL Preferred and GradEXCEL Custom (collectively, the “EXCEL Loans”), and Smart Option Student Loans. Private Graduate Loans made to law students (“Law Loans”) are marketed as LawEXCEL, LawEXCEL Preferred, LawEXCEL Custom, B&B EXCEL Custom and EXCEL Grad Extension Loan(SM) (collectively, the “LawEXCEL Loans”) and LAWLOANS (consisting of LAWLOANS®, LAWLOAN Private Loans(SM) and LAWLOAN Bar Study Loans). Private Graduate Loans made to medical students (“Medical Loans”) are marketed as MD EXCEL, Med EXCEL Preferred, Med EXCEL Custom, Med EXCEL, R&R EXCEL, R&R EXCEL Preferred, R&R EXCEL Custom and EXCEL Grad Extension Loan R&R (collectively, the “MD EXCEL Loans”) and MEDLOANS (consisting of MEDLOANS®, MEDLOAN Alternative Loan Program (ALP) loans and MEDEX Loan Program loans). Private Graduate Loans made to dental students (“Dental Loans”) are marketed as Dental EXCEL Preferred and Dental EXCEL Custom (together, the “Dental EXCEL Loans”) and DENTALoans (consisting of DENTALoans Private Loans, DENTALoans Advanced Study Private Loans and the DENTALoans Residency, Relocation and Licensure Exam Loans). Private Graduate Loans made to business school graduate students (“MBA Loans”) are marketed as MBA EXCEL, MBA EXCEL Preferred and MBA EXCEL Custom (collectively, the “MBA EXCEL Loans”) and MBA Loans®. Private Consolidation Loans are marketed as Private Consolidation Loans. Direct-to-Consumer Loans are marketed as Tuition Answer(SM) , Tuition Answer II and Tuition Answer for Employees First (collectively, “Tuition Answer Loans”). Career Training Loans are marketed as Career Training Loans, K-12 Loans and Tutorial Loans (collectively, “Career Training Loans”). EFG Loans are marketed as Platinum Alternative Loans, EFG Select Alternative Loans, EFG Select International Medical Schools Loans and EFG Medical Extra Loans. The Undergraduate and Graduate Loans, Medical Loans, Law Loans, MBA Loans, Private Consolidation Loans, Direct-to-Consumer Loans, Career Training Loans and EFG Loans are sometimes referred to collectively as the “Private Education Loans.”

Sallie Mae and Navient appear to have been open in this SEC filing, and others, regarding the eligibility of these student loans they participated in. But The Sallie Mae and Navient websites seem to be very silent on this issue. It’s not clear at all how the average consumer would know all of these private student loans may not be protected in bankruptcy. This is especially true if Navient and others pursued collection after bankruptcy and said the loans were not eligible for discharge. That appears to be exactly what happened in this case.

The Navient document gives more information about the loans that are “not federally guaranteed.”

Specific Program Information

The document says, “Some of the types of private education loans which may be serviced and purchased by the Companies include:

• Undergraduate and Graduate Loans. The Companies acquired Signature Student Loans and EXCEL Loans funded by several commercial banks in the United States. Signature Student Loans and EXCEL Loans provide undergraduate and graduate students (other than law, medical, dental or business school students) supplemental financing to help fund the cost of attending an undergraduate or graduate institution. Signature Student Loans and EXCEL Loans are serviced on behalf of the seller by the servicer or a subservicer identified in the prospectus supplement for your notes. They are not guaranteed by any federal guarantor, or by any governmental agency or by any private guarantor. Signature Student Loans and EXCEL Loans were not made to a single borrower in excess of the annual and aggregate limits imposed by the applicable loan program and were only made to eligible students who qualified pursuant to credit underwriting standards established by the program and related lender.
• Law Loans. The Companies acquired LAWLOANS and LawEXCEL Loans funded by several commercial banks in the United States. LAWLOANS and LawEXCEL Loans provided law students additional educational financing to help pay for the costs of attending law school and to finance the costs of taking one or more state bar examinations upon graduation from law school. LAWLOANS and LawEXCEL Loans are serviced on behalf of the seller by the servicer. They are not guaranteed by any federal guarantor, or by any other governmental agency or by any private guarantor. LAWLOANS and LawEXCEL Loans not made to a single borrower in excess of the annual and aggregate limits imposed by the applicable loan program and only made to eligible students who qualified pursuant to credit underwriting standards established by the program and related lender.
• Medical Loans. The Companies acquired MEDLOANS and MD EXCEL Loans funded by several commercial banks in the United States. MEDLOANS and MD EXCEL Loans provided medical students additional educational financing to help pay for the costs of attending medical school. None received a residency loan to finance the cost of participating in one or more medical residency programs if such student had applied for the loan within a limited period or after graduation. MEDLOANS and MD EXCEL Loans are serviced on behalf of the seller by the servicer. They are not guaranteed by any federal guarantor, or by any governmental agency or by any private guarantor. MEDLOANS and MD EXCEL Loans were not made to a single borrower in excess of the annual and aggregate limits imposed by the applicable loan program and were only made to eligible students who qualified pursuant to credit underwriting standards established by the program and related lender.
• Dental Loans. The Companies acquired DENTALoans and Dental EXCEL Loans funded by several commercial banks in the United States. DENTALoans and Dental EXCEL Loans provide dental students additional educational financing to help pay for the costs of attending dental school. A dental student may also receive a residency, relocation and licensure exam loan to finance the cost of participating in one or more dental residency programs if such student has applied for the loan within a limited period or after graduation. DENTALoans and Dental EXCEL Loans are serviced on behalf of the seller by the servicer. They are not guaranteed by any federal guarantor, or by any governmental agency or by any private guarantor. DENTALoans and Dental EXCEL Loans were not made to a single borrower in excess of the annual and aggregate limits imposed by the applicable loan program and were only made to eligible students who qualified pursuant to credit underwriting standards established by the program and related lender.
• MBA Loans. The Companies acquired MBA Loans and MBA EXCEL Loans funded by several commercial banks in the United States. MBA Loans and MBA EXCEL Loans provide business school students additional educational financing to help pay for the costs of attending graduate school. MBA Loans and MBA EXCEL Loans are serviced on behalf of the seller by the servicer. They are not guaranteed by any federal guarantor, or by any other governmental agency or by any private guarantor. MBA Loans and MBA EXCEL Loans were not made to a single borrower in excess of the annual and aggregate limits imposed by the applicable loan program and were only made to eligible students who qualified pursuant to credit underwriting standards established by the program and related lender.
• Direct-to-Consumer Loans. The Companies acquired Direct-to-Consumer Loans. Direct-to-Consumer Loans provide undergraduate and graduate students or other creditworthy individuals borrowing on behalf of students (other than law, medical, dental or business school students) supplemental financing to help fund the cost of attending an undergraduate or graduate institution. Direct-to-Consumer Loans are serviced on behalf of the seller by the servicer or a subservicer identified in the prospectus supplement for your notes. They are not guaranteed by any federal guarantor, or by any governmental agency or by any private guarantor. Direct-to-Consumer Loans were not made to a single borrower in excess of the annual and aggregate limits imposed by the applicable loan program and were only made to eligible students or other creditworthy individuals borrowing on behalf of students who qualified pursuant to credit underwriting standards established by the related lender.
• Private Consolidation Loans. The Companies acquired Private Consolidation Loans. Private Consolidation Loans allow eligible borrowers to combine several existing private education loans into one new loan. Private Consolidation Loans are serviced on behalf of the seller by the servicer or a subservicer identified in the prospectus supplement for your notes. They are not guaranteed by any federal guarantor, or by any governmental agency or by any private guarantor. Private Consolidation Loans may not be made to a single borrower in excess of the annual and aggregate limits imposed by the applicable loan program and may only be made to eligible borrowers who qualify pursuant to credit underwriting standards established by the related lender.
• Career Training Loans. The Companies acquire Career Training Loans funded by several commercial banks in the United States. Career Training Loans provide eligible borrowers financing at technical and trade schools, tutorial and learning centers, and private kindergarten through secondary education schools. Career Training Loans are serviced on behalf of the seller by the servicer or a subservicer identified in the prospectus supplement for your notes. They are not guaranteed by any federal guarantor, or by any governmental agency or by any private guarantor. Career Training Loans may not be made to a single borrower in excess of the annual and aggregate limits imposed by the applicable loan program and may only be made to eligible students or other creditworthy individuals borrowing on behalf of students who qualify pursuant to credit underwriting standards of the related lender.
• EFG Loans. The Companies’ entities acquired the EFG Loans, which were funded by commercial banks in the United States. EFG Loans provide private supplemental funding for undergraduate, graduate and health professional students. EFG Loans are serviced on behalf of the seller by the servicer or a subservicer identified in the prospectus supplement for your notes. They are not guaranteed by any federal guarantor, or by any governmental agency, but they may be guaranteed by a private insurer. However, no issuing entity or noteholder will have any benefit of any such insurance party. EFG Loans were not made to a single borrower in excess of the annual and aggregate limits imposed by the applicable loan program and were only made to eligible students or other creditworthy individuals borrowing on behalf of students who qualified pursuant to credit underwriting standards of the program and related lender.
• Smart Option Student Loans. The Companies acquire Smart Option Student Loans. Smart Option Student Loans provide private supplemental funding for certificate seeking, continuing education, undergraduate and graduate students at eligible degree-granting institutions and for students enrolled in non-degree granting institutions, such as technical training, trade and vocational schools and on-line courses. Smart Option Student Loans are serviced on behalf of the seller by the servicer or a subservicer identified in the prospectus supplement for your notes. They are not guaranteed by any federal guarantor, or by any governmental agency or by any private guarantor. Smart Option Student Loans may not be made to a single borrower in excess of the annual and aggregate limits imposed by the applicable loan program and may only be made to eligible students who qualify pursuant to credit underwriting standards established by Sallie Mae Bank.

So What Should You Do?

Since it is the status of the underlying school that matters most in bankruptcy protection and the document states loans were given to schools or organizations that were not Title IV compliant, the only thing you can do to verify your school is to have your attorney ask the lender what the FAFSA school code was at the time you attended. The FAFSA school code is assigned by the Department of Education to schools that are eligible and participating in the Title IV lending program.

I’ve also heard about Sallie Mae loans for rehab and other treatment programs. Those were not Title IV educational institutions.

Sallie Mae / Navient also disclosed that student loans made to consumers might also be partially dischargeable if they were disbursed directly to the borrower.

“In addition, direct-to-consumer loans are disbursed directly to borrowers based upon certifications and warranties contained in their promissory notes, including certification of the borrower’s cost of attendance. This process does not involve school enrollment verification as an additional criteria and, therefore, may be subject to some additional risk that the loans were not used for qualified education expenses and thus could become dischargeable in a bankruptcy proceeding.”

Sallie Mae / Navient obviously knew all or part of these direct disbursed loans were dischargeable in bankruptcy because they say so.

And unless I missed it, the document does not seem to make clear the obvious risk to any entities investing in these pools of student loans that the non-Title IV school lending is a huge risk.

I Want to Be Perfectly Clear Here

Not all Sallie Mae or Navient serviced student loans are eligible for bankruptcy because of this information. It is not the loan itself that would make it eligible but the entity that received the money that is key. Suppose the school or education entity was not Title IV eligible and did not have a FAFSA school code at the time of attendance. In that case, it appears these loans should be instantly dischargeable in consumer bankruptcy. This does not mean that the servicer will not claim otherwise or attempt to collect on a loan discharged in bankruptcy. Your bankruptcy attorney needs to be aware of this.

Additionally, Sallie Mae said that money that can’t be shown for a “qualified education expense” should also be discharged in bankruptcy. See this article.

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 sections 127, 135, 529, or 530 because of such expenses, and

(B) the amount of any scholarship, allowance, or payment described in section 25A (g)(2).

For more of a look at protected expenses, read the section below.

(3) Qualified higher education expenses

(A) In general The term “qualified higher education expenses” means—

1. tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution;
2. expenses for special needs services in the case of a special needs beneficiary which are incurred in connection with such enrollment or attendance
3. 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

1. 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.

2. Limitation The amount treated as qualified higher education expenses by reason of clause (i) shall not exceed—
   1. 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
   2. 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

This is sure to be an evolving story. You can read the Navient Remarketing Document I quoted from, below.

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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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