Update on Private Student Loans: Circuit Two Finds Section 523 “Education Benefits” Category Does Not Apply to Private Student Loans – Insolvency / Bankruptcy / Restructuring

United States: Private Student Loans Update: Circuit Two Finds Section 523 “Education Benefits” Category Does Not Apply to Private Student Loans

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The United States Court of Appeals for the Second Circuit recently ruled in favor of a private student loan borrower and found that his loans were canceled without him meeting the undue hardship requirement generally applied to loans students.1 The court ruled that the borrower’s loans were not an “obligation to repay funds received as an educational benefit” and were therefore discharging. In reaching this conclusion, the court held that private education loans that were not “eligible” under the bankruptcy code were generally subject to discharge, regardless of the undue hardship standard. The opinion noted that applying the “educational benefit” component to a loan would make each student loan an educational benefit and unduly broaden the scope of the law, which separately excludes the discharge of “qualifying private educational loans”. Navient Corp., the successor to Sallie Mae, the original loan manager, did not argue that the borrower’s loans were qualifying private student loans, possibly because the loans were made directly to the student. and used for living expenses rather than tuition. This decision brings the Second Circuit in line with the Fifth and Tenth Circuits, which recently reached similar conclusions.

The Homaidan Case

Hilal K. Homaidan received two direct consumer “Tuition Response Loans” from Sallie Mae for a total of over $ 12,000. The funds went directly to Homaidan’s bank account and, he said, was not used for education expenses. In 2009, after declaring bankruptcy under Chapter 7, Homaidan obtained a discharge order from the Bankruptcy Court of the United States, Eastern District of New York. releasable under Chapter 7 proceedings. According to Homaidan, Navient then “pester[ed]”to repay his loans, which led him” to assume that the loans had not been paid “. that Navient” employed a system of issuing dischargeable loans to unsuspecting student borrowers, then demanding the repayment even after the release of these bankruptcy loans “.

Section 523 (a) (8) generally prevents repayment of most student loans. The court, recognizing that the wording of 523 (a) (8) is “dense”, interpreted the law to mean “that three categories of student debt cannot be discharged in bankruptcy (in the absence of proof hardship): (1) loans and benefit from overpayments supported by the government or a non-profit organization; (2) obligations to repay funds received as an educational benefit, scholarship or allowance; and (3) “qualifying private educational loans”.

Navient admitted that his loans were not qualified private education loans and instead argued that they fall into the second bucket: an obligation to repay funds received as an educational benefit. First, Navient attempted to read “ready” in the text of the second category, section 523 (a) (8) (A) (ii), but the court concluded that “when Congress includes particular language in a section. . . but omits it in another … it is generally assumed that Congress acts intentionally … “Second, Navient argued that the phrase” obligation to repay “refers to a loan in other laws. court focused on the law at issue and found that “Congress has used the word ‘loan’ several times in 523 (a) (8) but omitted it from 523 (a) (8) (A ) (ii), indicating that the omission was intentional. “

The court ultimately noted that Navient’s interpretation of the law was untenable as it would “receive virtually all student loans within scope” and “swallow[]»The other paragraphs of the law. Indeed, the court agreed with Homaidan’s “narrower interpretation”, which “reserves a role for each” paragraph of the law: “§ 523 (a) (8) (A) (i) covers loans guaranteed by government and non-profit organizations and educational allowance overpayments; § 523 (a) (8) (A) (ii) covers scholarships, grants and conditional study allowances; and § 523 (a) (8) (B) covers private loans to persons attending eligible schools for certain eligible expenses. “2 Therefore, the court ruled that Navient’s loans did not fall into any of these categories and were discharged by the bankruptcy court’s initial discharge order.3

Eligible student loans

Navient did not argue that the loans in question were government or nonprofit guaranteed overpayments (the first category), or a qualified private educational loan (the third category). “For a loan to be ‘qualified’ under § 523 (a) (8) (B), the student must attend an eligible educational institution and the loan must finance only qualified higher education expenses. ” Homaidan alleged that the loans “were made outside the financial aid office and were not made for qualifying education expenses.” He also noted that “Section 6050S of the Internal Revenue Code requires lenders to issue tax forms 1098-E to all clients with qualified student loans, and [Navient] never issued him a 1098-E tax form. Whether his loans were actually “eligible” was not in court, however, based on the allegations, it appears they were not.


Although student loans are generally not dischargeable in the absence of proof of hardship, the Second Circuit ruling establishes that there is a sub-category of private unskilled student loans that are effectively dischargeable. Lenders and other investors in private student loan debt will need to assess whether the private student loan debt at issue qualifies or risks the potential release of unqualified private student loans if the borrower files for bankruptcy.


1. Homadian v. Sallie Mae, Inc., 3 F.4th 595 (2d Cir. 2021).

2. According to research cited by Bloomberg Law, the type of private “educational benefits” loan that the Second Circuit responded to probably amounts to around $ 30-50 billion in outstanding student debt, a small fraction of the total student debt of $ 1.7 trillion. .

3. The Fifth and Tenth Circuits recently came to similar conclusions. See McDaniel v. Navient Sols. LLC (In re McDaniel), 973 F.3d 1083 (10th Cir. 2020); Crocker against Navient Sols. LLC (In re Crocker), 941 F.3d 206 (5th Cir. 2019).

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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