A new court ruling states that private student loans can be repaid in the event of bankruptcy.
Here’s what you need to know – and what does it mean for your student loans…
United States Court of Appeals for the Second Circuit ruled in favor of a student loan borrower who sought to cancel a student loan for their private student loans. Here’s what happened.
Student Loan Cancellation: Bankruptcy
Plaintiff Hilal K. Homaidan borrowed student loans from Sally Mae (Navient became the assignee of these student loans) to attend Emerson College in Boston. The student loans consisted of two loans for tuition fees totaling $ 12,567. The plaintiff said these student loans were not used to pay for Emerson’s tuition and were transferred directly to his bank account. After graduation, Homaidan filed for bankruptcy to pay off his student loans. The bankruptcy court dismissed him from office, but did not specify in its decision whether private student loans would also be canceled. Lender Navient has begun collecting private student loan payments from Homaidan, the borrower. Homaidan agreed to pay off the private student loan, mistakenly believing that these student loans were not included in the discharge order. However, after paying the private student loans in full, Homaidan reopened the bankruptcy case to prove that the private student loans he had mistakenly repaid had been repaid as a result of bankruptcy.
Cancellation of student loans: what the court said
Here’s what the court found:
- Navient argued that Congress sought to exclude all private student loans from student loan payments.
- In the absence of the demonstration of “undue hardship,” three types of student loans cannot be repaid in the event of bankruptcy: (1) loans and overpayment of benefits provided by the government or a non-profit organization; (2) commitments to return funds received as an education grant, scholarship or scholarship; and (3) qualified private education loans.
- The only question is whether student loans constitute an “obligation to pay back funds received as an educational benefit,” as Navient did not argue that student loans were neither in the first nor in the third category.
- The court proceeded to analyze the official interpretation of the US Bankruptcy Code to determine the main meaning of the keywords in the text.
- The term “educational benefit” is “vague and potentially vague.” The Court concluded that these terms should be interpreted in the light of its “listed associates”, suggesting that “educational benefits” meant conditional payments of grants, similar to fellowships and fellowships. Since scholarships and scholarships are generally non-refundable, the plaintiff is not required to pay these private student loans in this case.
What does this mean for your student loans
This case is a win for student loan borrowers. As a result, more student loan borrowers may find it easier to repay private student loans in the event of bankruptcy. Typically, unlike mortgages or credit card debt, paying off student loans in the event of bankruptcy is difficult unless you can demonstrate “excessive difficulty.” If Congress does not abolish student loans, it is possible that some student loan borrowers who are struggling financially may, as a last resort, seek student loan repayment through bankruptcy proceedings. There is some bipartisan support for amending the US Bankruptcy Code to make it easier for student loan borrowers to cancel student loans in bankruptcy. This has not happened to date. However, if there is no widespread abolition of student loans, Congress may take action on student loans and bankruptcy.