More Student Loans, School Expenses Not Discharged in Bankruptcy

More student loans are not dischargeable in bankruptcy than ever before and the definition of student loan has been expanded to include private loans and expenses that are not “loans” in the traditional sense of the word loan.

The changes came after Congress passed the s0-called bankruptcy reform act in 2005 known as the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

“Expanded non-dischargeability includes just about anything” says Louis J. Wade, Kansas City, Missouri, attorney, speaking to school finance administrators. “Cost of attendance is very broad and includes tuition and much more.”

Wade explains the bankruptcy code refers to the Internal Revenue Service code, which in turn looks to the education code, to define what higher education expenses cannot be discharged in bankruptcy.  “With the passage of BAPCA in 2005, the exception to discharge for student loans was expanded to include any indebtedness used to pay “qualified higher education expenses” as that term is defined by section 221(d)(2) of the Internal Revenue Code,” he said.

• Section 523(a)(8)(B) of the Bankruptcy Code (as revised effective 10/17/05) excepts from discharge “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.”

• Section 221(d)(1) of the Internal Revenue Service code defines “Qualified Education Loan” to mean “any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses.  . .”

• Section 221(d)(2) of the IRS Code defines “qualified higher education expenses” to mean “the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 108711, as in effect on the day before the date of the enactment of this Act [enacted June 7, 2001]) at an eligible education institution. . . .”

• Section 108711 of the Higher Education Action of 1965, as amended (20 U.S.C. 108711) defines (in relevant part) the term “cost of attendance to include-
  • (1) tuition and fees normally assessed a student carrying the same academic workload as determined by the institution, and including costs for rental or purchase of any equipment, materials, or supplies required of all students in the same course of study;
  • (2) an allowance for books, supplies, transportation, and miscellaneous personal expenses, including a reasonable allowance for the documented rental or purchase of a personal computer, for a student attending the institution on at least a half-time basis, as determined by the institution . . .”

“Private student loans are now afforded the same exception to discharge protection as Federally guaranteed student loans, provided they meet the criteria outlined above,” Wade said.

Most student loans will meet these broader definitions and will be nondischargeable in bankruptcy unless the debtor files a separate adversary proceeding and successfully convinces the Bankruptcy Court that not discharging the loans would be an “undue hardship” on the debtor or debtor’s dependents, which is very difficult to do.