Student Loans: Maybe They Can Be Discharged After All

by Craig Andresen, Minneapolis, MN, Bankruptcy Attorney

March 14, 2008

Section 523(a)(8) of the Bankruptcy Code states that student loans cannot be discharged, unless payment of the student loans would impose an undue hardship upon the debtor or his dependents.  This section has been part of the bankruptcy law for over twenty-five years.  It was also amended in 2005 to include private student loans.

However, not all loans incurred in connection with education costs are student loans.  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.

If you have a student loan and are filing for bankruptcy, it would be wise to discuss with your attorney whether your student loan falls within these definitions.  Perhaps your student loan bill arrives from Sallie Mae and you attended a public university; in such a case you probably can conclude that your student loan qualifies under definition (1) above.  If so, you cannot discharge the student loan in bankruptcy unless you can prove undue hardship.

On the other hand, if you attended a for-profit trade school and obtained a private loan from the school, or from a financial institution to which the school referred you, maybe none, or only part, of such a loan qualifies under definition (2) above.  Remember, if a private student loan does not qualify under the extensive legal provisions referred to in definition (2), the loan is dischargeable without your having to prove undue hardship.

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.

Because section 523(a)(8) incorporates requirements contained in section 221(d) of the Internal Revenue Code, persons filing for bankruptcy and owing private student loans should carefully review section 221(d) with their attorney to determine if such loans are dischargeable.  Section 221(d) is lengthy, and it imposes many requirements which must be met before a loan can qualify as a student loan.  If your loans fail to meet these criteria, you may be able to discharge them in your bankruptcy.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.

Last modified: December 16, 2011