Student loans are a big deal in the United States. According to the most recent data from the Federal Reserve Bank of New York, there is currently $ 1.57 trillion in student debt outstanding, down from just $ 0.26 trillion 17 years ago.1 Before the CARES law suspended payments and accrued interest from August 2020 to January 2022, student debt holders were also the borrowers most likely to be over 90 days past due, hovering around 11% of 2012 to 2019. The current bankruptcy law allows the discharge of most students. extremely difficult loans; the borrower must establish “undue hardship”, a term not defined in the Bankruptcy Code, but which has been interpreted very strictly against student borrowers. The stratospheric increase in total student debt has many causes, but the student debt bankruptcy exemption is one of the most controversial. Following a recent ruling by the Second Circuit Court of Appeals, the scope of this exemption may shrink.
On July 15, 2021, the Second Circuit found that a student borrower’s private loans could be canceled because they were not covered by the definition of the exemption law. The student borrower obtained his loans from Navient Solutions, LLC and Navient Credit Finance Corporation (together “Navigate“), and after graduating from college, he filed a discharge request in 2009 which was ambiguous as to whether it applied to his Navient loans, Navient pursued repayment and the borrower complied. After paying off all of the loans, the borrower reopened his Chapter 7 and sought damages against Navient for violating the release order, arguing that his specific loans were not exempt. Navient’s petition to dismiss the claim was dismissed by the New York Eastern District Bankruptcy Court.The Second Circuit upheld, finding for the borrower.
The Bankruptcy Code specifies three categories of debts that will not be paid: (1) loans issued by the government or a non-profit organization, (2) obligations to repay funds received as an educational benefit, scholarship or allowance, and (3) student loans. “Qualified” loans should finance only eligible higher education expenses. Navient loans were not eligible as they were paid directly to the student borrower to be used as desired. Navient argued that the loans were an “obligation to repay funds” in order to advance his studies, thereby obtaining an “educational benefit”. The Second Circuit disagreed, believing that the law only covers a narrow category of conditional grant payments, not all private student loans. In a decision based on a purely statutory analysis, the Second Circuit found that not all private student loans are discharge exempt.
Only about eight percent of outstanding student loans are private, but that still totals about $ 130 billion in outstanding debt. This decision can end up being a camel’s nose on student debt relief. Certainly, many New York private loan holders will question whether their debts are “eligible” or dischargeable.
The case is Homaidan v. Sallie Mae, Inc., 3 F.4th 595 (2d Cir. 2021).
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