Student Loan Bankruptcy and the Meaning of Educational Benefit
American Bankruptcy Law Journal, 2019, Forthcoming
37 Pages Posted: 17 Mar 2018
Date Written: March 13, 2018
Student loans hold a special status in the Bankruptcy Code. Unlike any other consumer debt, they are not dischargeable through the normal bankruptcy process. Specifically, for any student loan that satisfies one of three statutory criteria, a court may only grant a discharge if the borrower proves “undue hardship.” This requirement presents a significant hurdle that discourages the vast majority of bankrupt debtors from ever pursuing a student loan discharge. Given the high deterrent effect of the undue hardship standard, it is, therefore, imperative that courts accurately determine which educational debts are nondischargeable. In this Article, I argue that bankruptcy courts have misinterpreted the statutory criteria. The ultimate consequence of this judicial error has been to misclassify billions of dollars of student loan debt and to prevent many borrowers from obtaining the bankruptcy relief to which they are entitled.
One phrase, in particular, has been the source of this problem: “educational benefit.” In their rulings, judges have held that this term includes any debt used for educational purposes. Under any of the prevailing interpretive frameworks, however, that reading is indefensible. The statutory text, legislative history, and policy considerations all indicate that the phrase educational benefit can only be read to refer to a narrow type of debt — namely, conditional educational grants. If courts adopt the interpretation set forth in this Article, they will not only be expressing fidelity to the statute and to congressional intent but also will be acting to provide financial relief to many debtors who have been hit hardest by the student loan crisis.
Keywords: Student Loans, Bankruptcy
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