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Did You Get Your Student Loan to Pay for Your Education or Your Rent?

Student Loan Justice is currently pushing the passage of HR 2366, a bill which would make educational debt dischargeable in bankruptcy on the same terms as consumer debt. While people often say that student loans cannot be discharged in bankruptcy, that isn’t actually what 11 USC Chapter 5 says. What it says is that a discharge in bankruptcy doesn’t discharge an individual debtor:

[u]nless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—
(A)(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.

Most people know of the undue hardship exception for discharge of student loans and most people know that many (albeit not all) courts have interpreted this mean that the debtor must subsist at or below the Federal Poverty Guidelines, which are not even subsistence level, e.g. the Federal Poverty level of a family of four in 2018 is $25,100. Any family in the USA with an income below that would be poor by any measure. Still, people could have earnings in excess of this level and still not be able to repay $10,000s of debt.

This brings us to the point of this post, when is student loan debt not educational debt? The statute doesn’t talk about student loans not being discharged. It talks about educational debt not being discharged. What if you used loans taken out during your college years to pay ordinary living expenses, rent, clothing, food, etc. and not to pay only for your college education? Presumably, the amounts you used for non-educational purposes should be dischargeable on the same terms as ordinary consumer debt, especially if they were private loans. Of course, there are downsides to qualifying the debt as ordinary consumer debt as that may make it harder for the debtor to pass the means test required for a Chapter 7 filing, see recent maximum income levels for each state here.

Sounds a bit complicated I know, but if you are serious about exploring your options for getting out of debt, it’s time to get granular and understand the nature of the debt you have undertaken. Our next blog post will be about qualifying educational debt as business debt, which again, may expand your options to discharge it under existing bankruptcy law.

About the author, Rose McConnell

Rose McConnell is an attorney practicing in Atlanta, Georgia. She is the author of Shun Student Loans; Get the Education You Need for the Fabulous Life You Want. Her concern over rising debt levels grew out of observing the devastating impact of excessive debt during the 2008 financial crisis. Many of her clients lost their homes, had their retirement savings decimated, and have never financially recovered. She podcasts to warn families of the dangers of student loans and to offer information to debtors struggling with repaying education loans.

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