The Worst Debt You Can Have: Student Loans (Part One)

21 Dec The Worst Debt You Can Have: Student Loans (Part One)

I’ll bet that if you asked the average person what debt is the worst kind of debt, he’d say taxes. But owing student loans is, ironically, far worse than owing Uncle Sam.

During my next few posts, I’ll examine exactly what a student loan is, a bit of history of how the Bankruptcy Code has dealt with student loans over the last few decades, current bankruptcy rules regarding discharging student loans, and various approaches to dealing with student loans.

Why should you care? Because student loans are one type of debt that is non-dischargeable in bankruptcywell, almost non-dischargeable.

To begin, let’s look at what a student loan is and what it’s not. Section 523(a)(8) contains the so-called student loan exception to discharge. The exception applies to:

  • an educational benefit, overpayment or loan, made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or a nonprofit institution; or
  • for an obligation to repay funds received as an educational benefit, scholarship or stipend; or
  • any other education loan that is a qualified education loan, as defined in section 221(d)(1) of the federal tax code.

Congress added this third class of loans those qualified education loans as defined in section 221(d)(1) of the tax code in 2005. A qualified education loan means any debt incurred by a taxpayer solely to pay “qualified education expenses.

Qualified education expenses, in turn, are defined by yet other act, the Higher Education Act. To recap, we’ve gone from (1) the Bankruptcy Code to (2) the Tax Code to (3) the Higher Education Act. Keep your seat belt on; we’re not done yet.

In section 472 of the Higher Education Act, we arrive at exactly what qualified education expense means. And it turns out that it’s a lot of things, including:

  • Tuition and fees (of course)
  • Books, supplies, transportation, and personal expense
  • Room and board
  • Dependent care for children of the student
  • Telecommunication expenses
  • Expenses of being part of a work cooperative

These expenses must be incurred by eligible students and at eligible institutions. So, for example, a student without a high school diploma or GED would not be an eligible student and a non-accredited institution would not be an eligible institution. These limitations are so narrow, however, that they would only apply to a minute percentage of the student loans made.

The bottom line to all this: a student loan is almost any obligation of any type used for practically any educational purpose even a purpose only loosely connected to the student’s education expenses such as transportation costs and costs of dependent care.

Russell A. DeMott is a Charleston, South Carolina bankruptcy lawyer representing debtors in Chapter 7 and Chapter 13 bankruptcy.

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Russell A. DeMott is a Charleston, South Carolina bankruptcy lawyer who represents consumer debtors in Chapter 7 and Chapter 13 bankruptcy. He is the author of the Charleston Bankruptcy Blog. He is also a member of the South Carolina Bankruptcy Blog. He files bankruptcy cases for clients in the Charleston, South Carolina division, which runs from Myrtle Beach to Beaufort. The DeMott Law Firm also represents clients in foreclosure defense and mortgage modification. You can also connect with Russ on Google Plus Russell DeMott. Russ can be contacted directly at (843) 695-0830 or by email at russ@demottlawfirm.com.
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