Non-Qualified Student Loans Can Be Discharged in Bankruptcy

You can discharge your non-qualified student loans in bankruptcy. Most student loans are “qualified” student loans and cannot be discharged in bankruptcy. But not so for non-qualified student loans.

What are non-qualified student loans?

Student loans are generally excepted from the bankruptcy discharge in 11 U.S.C. 523(a)(8). That section of the Bankruptcy Code prevents discharge of four distinct categories of educational loans:

1. Loans made, insured, or guaranteed by a governmental unit;
2. Loans fully or partially funded by a governmental unit or nonprofit institution;
3. Obligations to repay funds as an educational benefit, scholarship, or stipend; and
4. Any “qualified educational loan” as defined by Section 221(d)(1) of the Internal Revenue Code (“IRC”) of 1986.

The final category is the one we’re examining here. A “qualified educational loan” as defined by IRC 221(d)(1) is “any indebtedness incurred . . . solely to pay qualified higher education expenses.”

So in order to be a “qualified education loan,” the debt must be solely made for qualified higher education expenses. Thus, if a private student loan is partially outside the cost of attendance to a particular educational institution, then the entire loan is non-qualified and can be discharged. The IRC defines “cost of attendance” as “tuition, books and a reasonable allowance for room and board.” Loans made in excess of certified federal limits can be discharged in bankruptcy.

Make your case

Non-qualified private student loans made in excess of the “cost of attendance” are dischargeable. But you must file an adversary proceeding in your Chapter 7 bankruptcy to request that the court find those loans dischargeable.

Courts narrowly construe exceptions to discharge against creditors. So the student lender must (and will) fight your adversary proceeding and prove its case or your loan will be discharged in your Chapter 7.

You will need to meticulously document and calculate your loan amounts and for what purposes you used the funds. You will also need to research the cost of attendance figures for the institution(s) you attended. Student lenders do not just roll over in these cases, so you must be prepared to make your case.