A new court ruling says private student loans can be canceled in bankruptcy.
Here’s what you need to know – and what it means for your student loans.
The United States Court of Appeals for the Second Circuit ruled in favor of a student loan borrower who requested the cancellation of his student loan for his private student loans. Here is what happened.
Student loan cancellation: bankruptcy
Plaintiff Hilal K. Homaidan borrowed student loans from Sallie Mae (Navient became the successor to these student loans) to attend Emerson College in Boston. Student loans were two tuition response loans, which totaled $ 12,567. The plaintiff said these student loans were not used to pay for Emerson’s tuition and went directly to his bank account. After graduating, Homaidan filed for Chapter 7 bankruptcy to pay off his student loans. The bankruptcy court granted the discharge but did not specify in its decision whether private student loans would also be canceled. Navient, the lender, collected the private student loan payment from Homaidan, the borrower. Homaidan agreed to repay the private student loan under the mistaken belief that these student loans were not included in the discharge order. However, after fully repaying the private student loans, Homaidan reopened his bankruptcy case to argue that the private student loans he had paid in error had been released from bankruptcy.
Canceling student loans: what the court said
Here is what the court found:
- Navient argued that Congress sought to exclude all private student loans from the release of student loans.
- In the absence of a demonstration of “wrongful durss”, three types of student loans cannot be discharged in bankruptcy: (1) loans and overpayments supported by the government or a non-profit organization ; (2) the obligation to repay funds received as an educational benefit, scholarship or allowance; and (3) qualified private educational loans.
- The only question is whether the student loans constitute “an obligation to repay funds received as an educational benefit”, since Navient did not argue that the student loan fell into the first or third category.
- The court embarked on an analysis of the statutory interpretation of the United States Bankruptcy Code in order to determine the underlying meaning of the keywords in the text.
- The term âeducational benefitâ is âundefined and potentially vagueâ. The court concluded that the terms should be interpreted in light of its âlisted companions,â suggesting that âeducational benefitsâ mean conditional grant payments similar to scholarships and stipends. Since scholarships and stipends usually do not need to be repaid, the applicant in this case is not required to pay these private student loans.
What this means for your student loans
This case is a victory for student loan borrowers. Therefore, it may be easier for more student loan borrowers to be released from private student loans in the event of bankruptcy. Generally, unlike mortgages or credit card debt, it is difficult to pay off student loans in bankruptcy unless you can demonstrate “undue hardship.” If Congress does not cancel student loans, it is possible that some student loan borrowers who are experiencing financial difficulties may pursue the discharge of their student loans through the bankruptcy process as a last resort. There is some bipartisan support for changing the US Bankruptcy Code to make it easier for student loan borrowers to get their student loan canceled in the event of bankruptcy. To date, this has not happened. However, if there is no large-scale student loan cancellation, Congress could act on student loans and bankruptcy.
If you have student loans, make sure you understand all of your student loan repayment options. Here are some smart places to start saving money: