student loans

When is a “Student Loan” a “Student Loan”?

This topic deviates a bit from our typical article, however, the subject of student loans impacts nearly everyone in our industry.


Under § 523 of the Bankruptcy Code, to discharge student loans a debtor must show that “excepting such debt for discharge… would impose an undue hardship”. 11 U.S.C. § 523(a)(8).  I often tell debtor clients that in order to discharge student loans, you have to either be dead, or on death’s front door.

11 U.S.C. § 523(a)(8)

The issue of whether a “student loan” is dischargeable in a bankruptcy is relatively clear under § 523 and the court developed “Bruner Test[1] or the Eighth Circuit’s “Totality-of-the circumstances Test[2].

Section 523 provides as follows.

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—


 (i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

Section 523(a)(8) protects four categories of educational loans from discharge: (1) loans made, insured, or guaranteed by a governmental unit; (2) loans made under any program partially or fully funded by a government unit or nonprofit institution; (3) loans received as an educational benefit, scholarship, or stipend; and (4) any “qualified educational loan” as that term is defined in the Internal Revenue Code

In the wake of the failure and closing of multiple for profit colleges and universities, there has been a developing question as to what qualifies as a “student loan”, particularly under subsection B – the fourth category protected from discharge. Clearly, under § 523(a)(8)(A) there is not a dispute as to whether traditional student loans related to education at nonprofit institutions are “student loans” for purposes of § 523. But what is a “qualified education loan as defined in Section 221(d)(1) of the Internal Revenue Code of 1986?

26 U.S.C. § 221(d)

Section 221(d)(1) of the Internal Revenue Code of 1986 provides as follows:

(d)       Definitions For purposes of this section—


  1. Qualified education loan: The term “qualified education loan” means any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses—

(A) which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,

(B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and

(C) which are attributable to education furnished during a period during which the recipient was an eligible student.

Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. The term “qualified education loan” shall not include any indebtedness owed to a person who is related (within the meaning of section 267(b) or 707(b)(1)) to the taxpayer or to any person by reason of a loan under any qualified employer plan (as defined in section 72(p)(4)) or under any contract referred to in section 72(p)(5).

As is the case with most bankruptcy code and tax code sections one term is defined by a reference to another defined term.  Here, “qualified education loan” is a loan which is incurred “to pay qualified higher education expenses”. So what are “qualified higher education expenses”?

Subsection (d)(2) defines   “qualified higher education expenses” as follows:

(2) Qualified higher education expenses: The term “qualified higher education expenses” means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997) at an eligible educational institution, reduced by the sum of—

 (A) the amount excluded from gross income under section 127, 135, 529, or 530 by reason of such expenses, and

(B) the amount of any scholarship, allowance, or payment described in section 25A(g)(2).

For purposes of the preceding sentence, the term “eligible educational institution” has the same meaning given such term by section 25A(f)(2), except that such term shall also include an institution conducting an internship or residency program leading to a degree or certificate awarded by an institution of higher education, a hospital, or a health care facility which offers postgraduate training.

The Definition of “qualified higher education expenses” leads to two more questions. First what does “cost of attendance” mean; and second, what is “an eligible education institution”.

With respect to the definition of “cost of attendance”, I have included the full version of Section 472 of the Higher Education Act of 1965, however generally it includes the following:

  • Tuition and fees;
  • Rental of equipment, materials, or supplies required of all students in the same course of study;
  • An allowance for books, supplies, transportation, and miscellaneous personal expenses (including amounts for a personal computer); and
  • Room and board.

The Seventh Circuit, among others, has evaluated whether a loan is a “qualified educational expense” using the stated purpose for the loan at the time it was obtained, rather than focusing on how the actual loan funds were used by a borrowerSee In re Sokolik, 635 F.3d 261, 266 (7th Cir.2011); Murphy v. Pennsylvania Higher Educ. Assistance Agency (In re Murphy), 282 F.3d 868, 870 (5th Cir.2002).  This methodology is commonly referenced as the substance of the transaction test which recognizes the aims of §523(a)(8) to exclude entities that make educational loans from the effect of a debtor’s discharge. Tift County Hospital v. Nies (In re Nies), 334 B.R. 495, 501 (Bankr.D.Mass.2005).

Section 523(a)(8) is concerned with the circumstances surrounding the origination of the loan, rather than what benefits the debtor may have derived. In re Wills, 2010 WL 1688221 (S.D.Ind. April 23, 2010). Thus, “rather than trying to determine whether a computer purchased with loan money was used for schoolwork, personal use or some combination of both,” a bankruptcy court reviewing a § 523(a)(8) case “need only ask whether the lender’s agreement with the borrower was predicated on the borrower being a student who needed financial support to get through school.” In re Sokolik, 635 F.3d at 266

Based on the “substance of the transaction test” a variety of bankruptcy courts have determined that even funds used to pay living or social expenses are “qualified educational expenses” and therefore not dischargeable. Murphy, 282 F.3d at 870. See also In re Sokolik, 635 F.3d at 266; In re Noland, 2010 WL 1416788, *3–4 (Bankr.D.Neb. March 30, 2010); In re Hayes, 2006 WL 4481999, *4 (Bankr.D.Md. October 11, 2006); In re Nies, 334 B.R. at 502; In re Riley, 2005 WL 6443619, *5 (Bankr.N.D.Tex. June 17, 2005); In re Hamblin, 277 B.R. 676 (Bankr.S.D.Miss.2002); In re Roberts, 149 B.R. 547, 551 (C.D.Ill.1993); Barth v. Wisconsin Higher Educ. Corp. (In re Barth), 86 B.R. 146, 148 (Bankr.W.D.Wis.1988)

“An eligible education institution” is an institution which is described and eligible to participate in a program under Title IV of the Higher Education act of 1965 as amended. 26 U.S.C. § 25A(f)(2)In re Wills, 2010 WL 1688221, *7 (S.D.Ind. April 23, 2010).

Generally, Title IV of the Higher Education Act of 1965 covers the administration of the United States federal student financial aid programs. In fact, it was the Department of Education’s determination that ITT Educational Services, Inc. could no longer enroll students using federal financial aid funds (under IV of the Higher Education Act of 1965)[3] that was a big part of ITT’s ultimate undoing.


A “student loan” is a “student loan” when it is a “qualified education loan”, which is to say that the purpose of the loan was to fund “qualified higher education expenses” for the “cost of attendance” of a student at an “eligible education institution”.

The good news is that under § 523(a)(8) the initial burden is on the creditor to establish the existence of the debt and to demonstrate that the debt is non-dischargeable as a “student loan”. Raymond v. Northwest Educ. Loan Ass’n (In re Raymond), 169 B.R. 67, 69–70 (Bankr.W.D.Wash.1994), cited in In re Weldon, at *2; The Cadle Co. v. Webb (In re Webb), 132 B.R. 199, 201 (Bankr.M.D.Fla.1991)Accord In re Stone, 199 B.R. 753, 769 (Bankr.N.D.Ala.1996)In re Bachner, 165 B.R. 875, 881 (Bankr.N.D.Ill.1994)In re Phillips, 161 B.R. 945 (Bankr.N.D.Ohio 1993)In re Ealy, 78 B.R. 897 (Bankr.C.D.Ill.1987)In re Keenan, 53 B.R. 913 (Bankr.D.Conn.1985) (placing burden of proving that loan qualifies as a student loan “is consistent with the parties’ relative access to information”).

[1] Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395, 296 (2d Cir. 1987).

[2] Long v. Educ. Credit Mgmt. (In re Long), 322 F.3d 549, 554-55 (8th Cir. 2003).


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