What is a Qualifying Student Loan?

13 Oct What is a Qualifying Student Loan?

Current bankruptcy law exempts from discharge Any other loan that is a qualified education loan, as defined in §221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual. That section deals with claiming student loan interest as an itemized deduction for Federal income tax purposes. It refers to §472 of the Higher Education Act of 1965 for definition of a qualifying student loan. Ironically, open-ended provisions originally intended to help low-income students now provide an avenue whereby lenders can render consumer debt non-dischargeable.

The Higher Education Act of 1965 defined cost of attendance to include tuition and fees, an allowance for books, supplies, transportation, and miscellaneous personal expenses, and room and board. In the context of the Great Society and an optimistic expansion of social welfare programs, the framers probably envisioned that much of this cost would be borne by the public for students from low-income families. At the time, it was still possible to work your way through a public four-year college without relying on parental subsidies or substantial student loans.

By 1986, tuition and other costs had risen while the availability of outright grants and scholarships declined. Partly to encourage individuals to incur good debt, seen as a benefit to society as a whole, Congress added a portion of student loan interest to the list of itemizable income tax deductions. It would have seemed a disservice to debtor taxpayers to construe educational loans more narrowly than the 1965 act.

The IRS code defines qualified education loan as ANY indebtedness incurred by the taxpayer solely to pay qualified higher education expenses, and qualified education expenses as the cost of attendance as defined in the Higher Education Act of 1965. Universities provide cost of attendance estimates in their financial aid literature. For the University of Oregon, a public institution, the figure for a state resident is currently $17,448 per year, of which $6174 is tuition and fees. Does this convoluted chain of definitions mean that debts incurred by a student at this University, whether or not explicitly tendered as student loans, are treated as student loans up to $17,448 per year? In an admittedly non-exhaustive search through recent bankruptcy cases I have not seen a case in which a dispute arose as to whether an obligation, admitted to be a loan, was an educational loan or not. (There are a number of cases successfully challenging obligations to Universities as not fitting the definition of a loanI will discuss these in another blog.) This does not mean it can’t happen.

An intersection of BAPCPA and the Brunner Test ensures that student debtors who don’t land that dream job will be on a rice-and-beans budget indefinitely. If the University of Oregon’s cost of attendance figures are typical, the same frugality is not required of students incurring debt. For example, the budget allows $293 per month for food for a single person, as opposed to $162 for a recipient of food stamps. Some of this cost of attendance is actually a cost of overconsumption, resembling more the masses of credit card debt unwary consumers rack up for useless stuff in their frantic pursuit of the American dream, than the expenditures for knowledge and professional qualifications that the framers of the 1965 Education act envisioned.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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