Court Applies Purpose Test to Private Student Loan Discharge Case

Posted by NCBRC - January 11, 2021

Private loans extended for the purpose of paying the debtor’s “costs of attendance” at the University of Michigan and which, taken in conjunction with the debtor’s Pell Grants, did not exceed the debtor’s education expenses, fell within section 523(a)(8)(B)’s exception to discharge. MacEwan Conti v. Arrowood Indemnity Co., No. 20-1172 (6th Cir. Dec. 14, 2020).

The debtor financed her four-year education at the University of Michigan, in part, with over $76,000 in private loans from Citibank which Citibank paid directly to the University. Taken in conjunction with Pell Grants the debtor also received, the money the debtor received from Citibank did not exceed the cost of attendance. The loans were later assigned to Arrowood. Fourteen years after she graduated with a degree in musical arts, the debtor filed for chapter 7 bankruptcy. She filed an adversary complaint seeking to discharge the Citibank loans arguing that they were not qualified education loans within the meaning of section 523(a)(8)(B)’s exception to discharge. The bankruptcy court granted Arrowood’s motion for summary judgment and the district court affirmed.

In addition to government and non-profit student loans, section 523(a)(8)(B) excepts from discharge “any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code.” Section 221(d)(1) defines a qualified education loan as “any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses.”  The Higher Education Act of 1965 describes “education expenses” as comprising the “costs of attendance,” including tuition and fees, room and board, books and materials, transportation and other miscellaneous personal expenses.

On appeal, the Sixth Circuit was persuaded that the loans fell within the meaning of qualified education loan. In conducting its inquiry, the court applied the “purpose test” under which it looked at the purpose of the loans when they were issued rather than the ultimate use of the funds. The court therefore referred to the original lending agreements, noting that “the applications and promissory notes expressly: tie the loans to Conti’s student status at Michigan for a given enrollment period; limit the loan amount to the ‘full cost of education less any financial aid [she was] receiving’; limit use of the loan to ‘specific educational expenses’; and include an area for Michigan to certify the above information, including that the loan amount in combination with Conti’s other financial aid will not exceed Michigan’s cost of education.” This and the fact that Citibank paid the funds directly to the University, “suffice[d] to establish that Conti incurred the Citibank loans ‘solely to pay qualified higher education expenses’ at Michigan.”

The court rejected the debtor’s claims of disputed facts such as: the specific recipient of the funds, the actual cost of attendance, the applicable financial aid, and whether the University was “an ‘eligible’ student and educational institution,” on the basis that she had failed to raise those issues below. The court noted further that, other than her bare allegations relating to those disputed issues, she did not cite any evidence in support of them.

The court also rejected the debtor’s argument that because she never filed the tax form certifying that the loans were incurred to pay “qualified higher education expenses” in accordance with tax regulations, they cannot be considered qualified education loans under the Bankruptcy Code. The court found that the Bankruptcy Code imported the Tax Code’s definition of qualified education loan but did not likewise import the regulations for tax certification.

The court distinguished Shaffer v. Block, 705 F.2d 805 (6th Cir. 1983), where it required a showing that certain loans were “specifically earmarked” for educational purposes. That case was not in the context of bankruptcy but involved calculation of the borrower’s financial status for purposes of his eligibility for SNAP benefits.

The court concluded that the undisputed evidence supported the finding that the loans were incurred solely to pay the debtor’s qualified higher education expenses. It affirmed.

Conti 6th Cir Dec 2020



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