In a victory for people burdened with student loans, the Tenth Circuit joined the Fifth Circuit by holding that a loan to finance education is dischargeable unless it was either a “qualified education loan” as defined in the Internal Revenue Code or was made, insured, or guaranteed by a governmental unit or nonprofit institution.

If a loan does not fit into one of those two categories, the debt is dischargeable. In other words, Section 523(a)(8) does not mean that all student loans are nondischargeable.

Technically speaking, the Tenth Circuit held that a student loan is not an “obligation to repay funds received as an educational benefit” under Section 523(a)(8)(A)(ii).

The Student Loans

The husband and wife debtors had more than $200,000 in student loans. About half were to finance tuition and were nondischargeable under Section 523(a)(8)(B) because they were “qualified education loans.”

From the total, about $107,000 were so-called tuition answer loans made to pay the debtors’ living expenses while attending college. The tuition answer loans were not made or guaranteed by a governmental unit or nonprofit institution, nor were they qualified education loans.

The debtors confirmed a chapter 13 plan and received a discharge years later. The plan put all of the debtor’s education loans into a separate class where payment was deferred “until the end of the plan.” The plan did not say whether the student loans would or would not be discharged. Likewise, the discharge order only said that “most” student loans are not discharged.

During the life of the plan and continuing for about two years after discharge, the debtors paid about $65,000 on their student loans, including the tuition answer loans.

Two years after discharge, the debtors reopened their case and filed a complaint seeking a declaration that the $107,000 in tuition answer loans was not discharged. They also sought damages for collection actions that allegedly violated the discharge order.

The lender filed a motion for summary judgment, asking Bankruptcy Judge Kimberley H. Tyson of Denver to rule that none of the debtors’ student loans were dischargeable, including the tuition answer loans. The lender also wanted Judge Tyson to rule that nondischargeability of the student loans was res judicata by virtue of the confirmation order.

Judge Tyson rejected the res judicata argument. She also denied the lender’s summary judgment motion, ruling that the tuition answer loans were discharged because they were not an “educational benefit” under the plain language of Section 523(a)(8)(A)(ii).

Judge Tyson certified a direct, interlocutory appeal to the court of appeals. The Tenth Circuit accepted the appeal and upheld Judge Tyson in an opinion on August 31 by Circuit Judge Jerome A. Holmes.

Student Loans Are Not an Educational Benefit

In significant part, Judge Holmes followed the Fifth Circuit’s opinion in Navient Solutions LLC v. Crocker (In re Crocker), 941 F.3d 206 (5th Cir. Oct. 21, 2019). The New Orleans-based court held that an “obligation to repay funds received as an educational benefit” under Section 523(a)(8)(A)(ii) does not include student loans. To read ABI’s report on Crocker, click here.

Judge Holmes explained that Section 523(a)(8) makes student loans nondischargeable if they fall into one of three categories: (1) a “qualified education loan,” as defined in the IRS Code, under Section 523(a)(8)(B); (2) a “loan made, insured, or guaranteed by a governmental unit, or . . . funded . . . by a governmental unit or nonprofit institution . . . .” under Section 523(a)(8)(A)(i); or (3) “an obligation to repay funds received as an educational benefit, scholarship or stipend” under Section 523(a)(8)(A)(ii).

The lender conceded that the tuition answer loans were neither qualified education loans nor made or guaranteed by a governmental unit or nonprofit organization. As a function of statutory construction, Judge Holmes concluded that the tuition answer loans were discharged because “they are not ‘obligations to repay funds received as an educational benefit.’”

Observing that Section 523(a)(8)(A)(ii) does not include the word “loan,” Judge Holmes concluded that “Congress presumably did not intend” the subsection “to also cover” loans. If Section 523(a)(8)(A)(ii) made loans nondischargeable, the other provisions in Section 523(a)(8) would be surplusage, he said.

To Judge Holmes, it was “clear” that “the statutory terms ‘obligation to repay funds received as an educational benefit’ and ‘educational loan’ mean separate things.”

For a “normal English speaker,” Judge Holmes said, an “educational benefit” refers “to things like a health benefit, unemployment benefit, or retirement benefit.” In other words, he said, a benefit “implies a ‘payment,’ ‘gift,’ or ‘service’ that ordinarily does not need to be repaid.”

Judge Holmes based his conclusion on the canon against surplusage and the canon of noscitur a sociis. Roughly speaking, the noscitur canon means that ambiguous words should be interpreted by considering the words with which they are associated in the text.

Loans must always be repaid, but the words “scholarship” and “stipend” in Section 523(a)(8)(A)(ii) signify something that may not need to be repaid. Judge Holmes therefore relied on the noscitur canon in concluding that “educational benefit” does not include loans. In other words, he said that the amendments in 2005 did not make all private student loans dischargeable, as the Fifth Circuit “persuasively” ruled in Crocker.

Like Bankruptcy Judge Tyson, Judge Holmes rejected the notion that res judicata made the loans nondischargeable.

The only provision in the plan dealing with student loans said they were deferred until the end of the plan. Judge Holmes could therefore “discern nothing in the plan . . . showing that their Tuition Answer Loans are excepted from discharge.” Thus, “the issue [regarding discharge of student loans] is not res judicata under the plan.”

Affirming Bankruptcy Judge Tyson and remanding for further proceedings, Judge Holmes held “that § 523(a)(8)(A)(ii) does not except student loans from discharge and, consequently, that the exception does not cover the [debtors’] Tuition Answer Loans.”