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Sample Private Student Loan Adversary Proceeding

May 16, 2020

Private student loans are typically easier to get rid of in bankruptcy than federal student loans.

With federal student loan debt, there’s only one way to discharge them: prove undue hardship.

Click here to learn How to Prove Undue Hardship Using the Brunner Test

But with private student loans, you have two options:

  1. prove undue hardship or
  2. argue the private student loan isn’t excepted from discharged under section 523(a)(8).

Click here to learn How to Discharge Private Student Loans in Bankruptcy.

This second argument is a bit complex so let me explain briefly.

The Bankruptcy Code protects 3 types of student loans from discharge:

  1. Student loans made by the federal government (Direct Loans, FFEL Loans, Parent Plus Loans, etc.)
  2. Student loans made under a program funded by the federal government or a nonprofit (e.g. Perkins Loans)
  3. Student loans made by private lenders that meet the strict requirements to be a qualified education loan.

A private student loan is a qualified education loan if it was (1) borrowed by a taxpayer (2) solely to pay qualified higher education expenses.

Qualified higher-education expenses are the costs set by the school for a student to attend an eligible educational institution that semester/school year.

To understand qualified higher education expenses, we have to define two terms:

  1. cost of attendance and
  2. eligible education institution.

Cost of attendance includes:

  • tuition and fees
  • an allowance for books, supplies, transportation, and miscellaneous personal expenses
  • an allowance for room and board and
  • an, if the student is disabled, an allowance for expenses related to the student’s disability.

Basically, cost of attendance is the budget the school sets for you each year.

Meanwhile, an eligible educational institution is an institution that participates in the federal student aid program.

Taken together and simplified, a private student loan is a qualified education loan if two things are true:

  1. the loan did not exceed your cost of attendance and
  2. you borrowed the loan while attending a school that received federal student aid.

So if you borrowed a private student loan from a school that didn’t receive federal student aid (truck driving schools, helicopter schools, etc.) then the loan isn’t a qualified education loan and may be discharged.

Likewise, if you borrowed a student loan that was more than your cost of attendance, then the loan isn’t a qualified education loan and may be discharged.

Do either of those things mean you automatically win? No.

The private lender may still argue the loan was made under a program funded by a nonprofit. (For what it’s worth, I think that’s a b.s. argument, but case law disagrees with me.)

Typically, you’ll see that argument with loans held by one of the National Collegiate Student Loan trusts.

Anyways…that’s an overview of the dischargeability of private student loans in bankruptcy.

If you’re curious about seeing what that argument looks like in an adversary proceeding, check out the sample complaint below.

Flat lay of an adversary proceeding to discharge private student loans in bankruptcy.

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