Private Student Loan Not “Educational Benefit”

Posted by NCBRC - July 23, 2021

A private student loan is not a conditional grant and therefore does not fall within the meaning of section 523(a)(8)(A)(ii) which excepts from discharge an “educational benefit, scholarship, or stipend.” Homaidan v. Sallie Mae, Inc., No. 20-1981 (2d Cir. July 15, 2021).

The chapter 7 debtor received a bankruptcy discharge that was ambiguous as to whether it applied to the “Tuition Answer Loans” he obtained from Navient (as successor to Sallie Mae,Inc.) The loans, in the amount of $12,567, were paid directly into the debtor’s bank account, and exceeded the debtor’s tuition obligation. Post-discharge, Navient pursued repayment of the loans, and the debtor complied, ultimately paying them off. The debtor then reopened his bankruptcy and filed an adversary proceeding seeking an order holding Navient in contempt for violation of the discharge violation. The court determined that the loans had been discharged and denied Navient’s motion to dismiss. Homaidan v. SLM Corp. (In re Homaidan), 596 B.R. 86, 107 (Bankr. E.D.N.Y. 2019). The Second Circuit granted Navient’s petition for direct appeal.

Section 523(a)(8)(A) excepts from discharge three types of student loans: “(1) loans and benefit overpayments backed by the government or a nonprofit; (2) obligations to repay funds received as an educational benefit, scholarship, or stipend; and (3) qualified private educational loans.”

On appeal, Navient argued that the loan fell under section 523(a)(8)(A)(ii) as an “obligation[s] to repay funds received as an educational benefit, scholarship, or stipend.”

The court disagreed, finding the language used in the provision would be an unnecessarily strained way of saying “student loan,” but would be a natural way of describing other types of obligations, such as conditional grants.

The court was also persuaded that Congress’s failure to use the word “loan” in (A)(ii), while using that word in the preceding and following provisions, was a significant indicator that Congress did not intend (A)(ii) to include loans.

The court found section 523(a)(8)(B)’s reference to any “other” loan, did not mean that all the obligations in paragraph (a)(8)(A) were loans. Rather, the court found paragraph (a)(8)(B) referred only to section 523(a)(8)(A)(i) and (iii). Likewise, the court was unconvinced by Navient’s reference to other statutory provisions not related to student loans in which Congress used the term “obligation to repay” to encompass loans. The court found that, in the case of section 523(a)(8)(A), Congress’s use of the word “loan” on either side of the provision at issue here, was a stronger indication that, where that word was not used, its absence was deliberate.

In fact, Navient’s interpretation of section 523(a)(8)(A)(ii) was so broad it would swallow up sections 523(a)(8)(A)(i) and 523(a)(8)(B), rendering them superfluous.

From a historical perspective, when Congress enacted BAPCPA in 2005 it specified the three types of obligations that were nondischargeable absent a showing of undue hardship. Prior to 2005, courts generally agreed that private student loans were not subject to exception from discharge. The court found the BAPCPA amendment, which simply divided the earlier provision into its component parts without changing the language except to add an Oxford comma, did not change that.

On the other hand, in the BAPCPA amendments, Congress specifically addressed private student loans by adding section 523(a)(8)(B) which makes nondischargeable “any other educational loan that is a qualified education loan, as defined in section 221(d)(1)” of the Internal Revenue Code. Again, the Second Circuit found that, under Navient’s interpretation of section 523(a)(8)(A)(ii), that addition to the Code would be rendered superfluous.

Instead, the court agreed with the debtor’s interpretation of section 523(a)(8) under which section “523(a)(8)(A)(i) covers government and nonprofit-backed loans and educational benefit overpayments; § 523(a)(8)(A)(ii) covers scholarships, stipends, and conditional education grants; and § 523(a)(8)(B) covers private loans made to individuals attending eligible schools for certain qualified expenses.”

Under the doctrine of noscitur a sociis, to the extent the term “educational benefit” is ambiguous, it must be limited by the surrounding words “scholarship” and “stipend,” both of which describe conditional grants. A loan, on the other hand, must be repaid regardless of conditions.

The court affirmed the bankruptcy court’s decision.

Homaidan 2d Cir July 2021


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