With more than $1.7 trillion in student loan debt outstanding in the United States, student loan borrowers sometimes try to turn to the bankruptcy courts for relief, often without success due to the fact that most student loans are presumed to be nondischargeable.[1]  In its July 15, 2021 decision in In re Homaidan,[2] the Court of Appeals for the Second Circuit considered one aspect of this issue—whether certain private student loans made directly to a borrower are automatically presumed to be nondischargeable as “educational benefits” under Section 523(a)(8) of the Bankruptcy Code.  The Second Circuit found they are not, ruling against the appealing student loan lender.

Under the facts at issue in Homaidan, when the debtor was attending college between 2003 and 2007, he obtained two “direct-to-consumer Tuition Answer Loans.”  The debtor alleged that these loans were made independently of the debtor’s college’s financial aid office, were deposited directly into his bank account, and exceeded the cost of his tuition.  After graduating, the debtor filed a Chapter 7 bankruptcy case and obtained a discharge without ever litigating whether those student loans were dischargeable or, in fact, discharged.  After the bankruptcy case closed, the debtor’s student loan lender continued to pursue collection of the loans and the debtor, believing that the loans were still valid and enforceable, repaid them in full.

In 2017, the debtor moved to reopen his bankruptcy case to obtain a determination that the loans were, in fact, discharged.  He then commenced a proceeding against the lender alleging, among other things, that the lender violated his rights by collecting the discharged student loans.  The lender moved to dismiss on the basis that the loans at issue fell under the “educational benefit” exception to discharge.  The bankruptcy court disagreed and denied the lender’s motion to dismiss.  Agreeing with the bankruptcy court, the Second Circuit found that the loans at issue were potentially dischargeable—i.e., there was not a blanket rule that all private student loans were not dischargeable—based on its view that the “educational benefit” exception in Section 523(a)(8) has a fairly limited scope.

Specifically, the Second Circuit noted that Section 523(a)(8) includes three classes of educational debts that are nondischargeable: (1) loans issued or insured by the government; (2) obligations to repay funds received as an “educational benefit, scholarship, or stipend;” and (3) “any other educational loan” that meets the Internal Revenue Code’s definition of a “qualified educational loan.”[3]  The lender’s appeal claimed only that the student loans at issue fit into the “educational benefit, scholarship, or stipend” category,[4] and it did not argue that the loan was a “scholarship” or “stipend.”  So, the only question was whether the loan was in fact an “obligation to repay funds received as an educational benefit.”

The Second Circuit held that it was not, relying on a variety of tools of statutory interpretation.  The court first noted that the plain meaning of Section 523(a)(8)(A)(ii)’s reference to an “obligation to repay funds received as an educational benefit” could not just be synonymous with student loans, because Congress would not have referred to student loans “in such stilted terms.” The court also considered the context of Section 523(a)(8)(A)(ii)—emphasizing that both the preceding and subsequent categories of educational debts use the word “loans,” so the omission of that word from the “educational benefit” category suggested that it did not include loans.  Also applying the canon against surplusage (i.e., interpreting a statute so that none of its words are superfluous), the court observed that interpreting the “educational benefit” to include loans would swallow up the first and third categories in their entirety (since the second category would already include the same loans also referred to by the first and third categories) improperly rendering those separate provisions meaningless.  Finally, the court applied the noscitur a sociis canon (i.e., that an ambiguous term’s meaning can be gleaned from the context of the words surrounding it), noting that “scholarships” and “stipends” under Section 523(a)(8)(A)(ii) refer to grant payments that, unlike a loan, would generally not need to be repaid and therefore “education benefit” should be interpreted in the same manner.

Thus, the court concluded that the “educational benefit” excepted from discharge under Section 523(a)(8)(A)(ii) is best read to refer to conditional grant payments similar to scholarships and stipends, such as where an organization pays an individual’s tuition in exchange for the individual’s promise of some sort of future performance, rather than a student loan.  When the individual, after receiving the benefit of the tuition, breaks his return promise, he incurs an “obligation to repay” the funds paid towards his tuition, and therefore has an obligation that is presumed nondischargeable under Section 523(a)(8)(A)(ii).

While Homaidan is likely to be a somewhat significant decision in the further development of student loan bankruptcy jurisprudence, it should be noted that the decision was relatively limited in scope, addressing only the “educational benefit, scholarship, or stipend” category of education-related debts in Bankruptcy Code Section 523(a)(8)(A)(ii).  Many, if not most, private student loans will still qualify as “any other educational loan” that are presumed to be nondischargeable under Section 523(a)(8)(B) of the Bankruptcy Code, provided that they otherwise meet the criteria for qualified educational loans under the Internal Revenue Code.  In those cases, either the Brunner or totality of circumstances test will still determine whether the debtor can obtain a student loan discharge.

[1] Most of these cases involve the application of either the Brunner or the “totality of the circumstances” tests to determine whether the presumption of nondischargeability can be rebutted on the basis of an undue hardship to the debtor.  See, e.g., Matter of Thomas, 931 F.3d 449, 452 (5th Cir. 2019) (applying the three-prong Brunner test rather than the “nebulous” totality of the circumstances test).

[2] Homaidan v. Sallie Mae, Inc. (In re Homaidan), No. 20-1981, 2021WL 2964271 (2d Cir. July 15, 2021) (slip op.).

[3] 11 U.S.C. § 523(a)(8).

[4] See 11 U.S.C. § 523(a)(8)(A)(ii).