Tenth Circuit Agrees with the Fifth Circuit – Private Student Loans May be Dischargeable in BankruptcyThe 10th Circuit has joined several circuit courts holding that private student loans are dischargeable in bankruptcy. In McDaniel v. Navient Solutions, a case of first impression in the 10th Circuit, the court concluded that an educational loan does not constitute “an obligation to repay funds received as an educational benefit” under Section 523(a)(8)(A)(ii) of the Bankruptcy Code. In Fall 2019, the Fifth Circuit in Crocker v. Navient Solutions similarly held that private educational loans are not statutorily excepted from discharge, absent undue hardship. In other words, they can be discharged like other debt. We previously blogged about the Crocker case, which was widely cited in the McDaniel opinion.

The McDaniel case involved a Chapter 13 filing where the debtors had eleven student loan accounts, owing approximately $200,000. The debtors’ confirmed Chapter 13 plan provided that “[s]tudent loans are to be treated as an unsecured Class Four claim or as follows: deferred until end of plan.” A standard discharge order was issued, and the case was closed. After the discharge, the McDaniels made approximately $37,000 in payments on the loans. The debtors subsequently reopened the bankruptcy case and filed a complaint against Navient seeking (i) a declaratory judgment that their student loans were discharged in bankruptcy and (ii) damages arising from discharge violations. On appeal, the court addressed (1) whether it was res judicata that the student loans were excepted from the discharge based on the confirmed Chapter 13 plan and (2) whether the student loans are non-dischargeable under § 523(a)(8)(A)(ii).

The 10th Circuit summarily rejected the assertion that the plan established that the student loans were excepted from discharge because the plan contained no explicit statement or determination as to the dischargeability of the student loans. The 10th Circuit next tackled whether private educational loans are subject to discharge. Section 523(a)(8)(A)(ii) of the Bankruptcy Code provides:

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for –

(A)(i) 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 nonprofit institution; or

(ii)  an obligation to repay funds received by an educational benefit, scholarship, or stipend; or

(B) 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. (emphasis added)

Like the Fifth Circuit in Crocker, the 10th Circuit emphasized that exceptions to discharge should be interpreted narrowly in favor of the debtor. The court then walked through the various statutory canons to interpret the statute. The 10th Circuit focused on use of the terms “educational loan” versus “obligation to repay funds received as an educational benefit” and concluded that these clearly mean separate things.  The term “educational benefit” is more akin to the other terms in section (A)(ii) (scholarship and stipend) which “signify granting, not borrowing.” In the court’s view, normal speakers of English use the term “benefits” in the context of things such as health benefits, unemployment benefits or retirement benefits to imply a payment, gift or service, not something that needs to be repaid. If section (A)(ii) included repaying private student loans as an “educational benefit,” section (A)(i) would be redundant and contrary to the canon against surplusage. The court concluded that “an obligation to repay funds received as an educational benefit” signifies a conditional grant of funding for education – akin to a stipend and scholarship – as opposed to a loan of funds for education. In other words, “[s]ubsection (A)(ii) was designed to except from discharge grants of money that are tied to service obligations – a category wholly distinct from loans.”

Following the 2005 amendments to Section 523, commentators painted with a broad brush alleging that private student loans were now dischargeable. However, the McDaniel case reflects the growing trend permitting a debtor to discharge certain private student loans. Private student lenders and servicers should take particular note of this case as the latest chapter and prepare for similar challenges.