On August 31, 2020, the Tenth Circuit affirmed the United States Bankruptcy Court for the District of Colorado’s holding that certain student loans not guaranteed by a governmental unit may be discharged in bankruptcy.

Navient Solutions, LLC argued that the debtors’ student loans were excepted from their Chapter 13 discharge under 11 U.S.C. § 523(a)(8)(A)(ii) which excepts “an obligation to repay funds received as an educational benefit, scholarship, or stipend.” The bankruptcy court dissected the provision and held that the debtors’ tuition loans are not “obligations to repay funds received as an educational benefit.”

In coming to this conclusion, the bankruptcy court focus on a few key points:

  • First, “an adjoining subsection of the statute excepts from discharge ‘an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit.’” (Emphasis added.) Thus, an educational benefit is different than a loan.
  • Second, adjoining subsections expressly use the word “loans” and “Congress presumably did not intend the exception set forth in § 523(a)(8)(A)(ii) to cover loans because it does not mention the word loans at all.
  • Third, to read the word “loans” into § 523(a)(8)(A)(ii) “would violate the canon against surplusage.
  • Fourth, student loans are not encompassed by the phrase “funds received as an educational benefit” because “each of the terms in the series ‘educational benefit, scholarship, or stipend’ signify conditional grants of money that generally need not be repaid by their recipients, whereas loaned money must be repaid.”

The Tenth Circuit found the bankruptcy court’s reasoning sound and held it is clear that “obligation to repay funds received as an educational benefit” and “educational loans” have different meanings. The Court of Appeals went on to remark that the term “educational benefit,” similar to other benefits – retirement benefit or health benefit – is something that “ordinarily does not need to be repaid.”

Ultimately, the Tenth Circuit found that § 523(a)(8)(A)(ii), when read correctly in its view, “signifies a conditional grant of funding for education – akin to a stipend and scholarship – as opposed to a loan of funds for education.”

This decision weakens the bankruptcy protections for private student lenders and signals the possibility for other courts around the country to follow suit and discharge certain private student loans.