Employing emphatic language, the Second Circuit joined two other circuits by holding that all student loans are not excepted from discharge simply because they are student loans.
Technically speaking, the appeals court held that private student loans are not excepted from discharge under Section 523(a)(8)(A)(ii). The only subset of private student loans excepted automatically from discharge are those falling under Section 523(a)(8)(B).
As Circuit Judge Dennis Jacobs said in his July 15 opinion, a private loan is excepted from discharge under Section 523(a)(8)(B) only if it was “made to individuals attending eligible schools for certain qualified expenses.”
The Loans in the Class Action
The facts of the case explain the breadth of the holding.
A student took down about $12,500 in loans from a private lender in the course of obtaining an undergraduate degree. The loans were not made through the college’s financial aid office and were disbursed directly to the student’s bank account. The student alleged that the loans were not made solely to cover the cost of attendance.
Soon after college, the student filed a chapter 7 petition, listed the student loans among his debts and received a general discharge. Of course, the discharge order did not specify which debts were discharged and which were not.
As Judge Jacobs said, the lender hired a collection agent “to pester” the debtor. Assuming the loans had not been discharged, the debtor paid them off.
In 2017, the debtor reopened his bankruptcy case and filed a purported class action in bankruptcy court. According to Judge Jacobs, the debtor’s adversary proceeding alleged that the lender “employed a scheme of issuing dischargeable loans to unsophisticated student borrowers and then demanding repayment even after those loans are discharged in bankruptcy.”
The lender filed a motion to dismiss that was denied by Bankruptcy Judge Elizabeth S. Stong of Brooklyn, N.Y. The lender appealed, and the district court certified a direct appeal to the Second Circuit. The appeals court accepted the appeal.
No Circuit Split
The lender argued on appeal in the Second Circuit that Congress intended in Section 523(a)(8) to bar discharge of all private student loans. The Fifth and Tenth Circuits already disagreed. See Crocker v. Navient Sols. LLC (In re Crocker), 941 F.3d 206 (5th Cir. 2019); and McDaniel v. Navient Sols. LLC (In re McDaniel), 973 F.3d 1083 (10th Cir. 2020). To read ABI’s reports on those cases, click here and here.
As the Second Circuit is wont to do, Judge Jacobs assigned little import to the circuits with which he would agree. He launched into his own analysis, which he defined as solely a question of statutory interpretation subject to de novo review. Indeed, he said that the “inquiry begins (and in this case ends) with the statutory text.”
The lender conceded that the loan could be nondischargeable only under Section 523(a)(8)(A)(ii), which makes a debt automatically nondischargeable if it was “an obligation to repay funds received as an educational benefit, scholarship, or stipend.”
Therefore, Judge Jacobs said, the debt would be excepted from discharge only if it was “an educational benefit,” a term not defined in the statute. On that point, the lender relied on a nonprecedential Second Circuit opinion that appears to say that a private loan is nondischargeable under Section 523(a)(8)(A)(ii).
Reflexively, Judge Jacobs said that his panel was not bound by a nonprecedential opinion. Furthermore, he said that the prior panel dealt with a different issue and “did not squarely take on the statutory interpretation question.”
Looking at the statutory language, Judge Jacobs said that the lender’s argument was “unsupported by plain meaning.” He quoted the Tenth Circuit for saying that “no normal speaker of English” would read the language as the lender urged. McDaniel, supra, 973 F.3d at 1096.
If Congress had intended to make all private loans nondischargeable, “it would not have done so in such stilted terms,” Judge Jacobs said. The statutory text “more naturally” coincides with “educational benefits that students may become obligated to repay, such as conditional grants.”
Notably, Section 523(a)(8)(A)(ii) does not use the word “loan” but is “sandwiched” between two other subjections that do use the word. Judge Jacobs surmised that the omission was “intentional.”
If the lender’s reading were law, Judge Jacobs said, “virtually all student loans” would be made nondischargeable under Section 523(a)(8)(A)(ii), leaving the other subjections with no work. He parsed the section’s history and concluded that the 2005 amendments to the Bankruptcy Code were not designed to make all student loans dischargeable.
The “more significant modification” in the 2005 amendments was the introduction of Section 523(a)(8)(B), Judge Jacobs said. That new subjection “excepts a subset of private loans,” namely “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.”
In other words, the lender was contending that Congress enacted Section 523(a)(8)(B) to preclude the discharge of a type of loans that were already excepted from discharge.
Judge Jacobs supported his reading of the statute with the canon of construction known as noscitur a sociis. He said that the rule “instructs us to cabin [the words ‘educational benefit’] such that its scope aligns with that of its listed companions — ‘scholarship’ and ‘stipend.’”
In that respect, Judge Jacobs said that “scholarship” and “stipend” are conditional grants not generally required to be repaid. The “defining characteristic” of a loan, “by contrast, is an unconditional obligation to pay it back.”
Judge Jacobs summarized the types of student loans that are discharged and those that are not. Nondischargeable debts in Section 523(a)(8)(A)(i) are “government and nonprofit-backed loans and educational benefit overpayments,” along with “private loans made to individuals attending eligible schools for certain qualified expenses” under Section 523(a)(8)(B).
The only nondischargeable obligations under Section 523(a)(8)(A)(ii) are “scholarships, stipends and conditional education grants,” not loans.
Judge Jacobs upheld denial of the lender’s motion to dismiss, holding that an educational benefit “is therefore best read to refer to conditional grant payments similar to scholarships and stipends.”
Employing emphatic language, the Second Circuit joined two other circuits by holding that all student loans are not excepted from discharge simply because they are student loans.
Technically speaking, the appeals court held that private student loans are not excepted from discharge under Section 523 a 8 A ii. The only subset of private student loans excepted automatically from discharge are those falling under Section 523 a 8 B.
As Circuit Judge Dennis Jacobs said in his July 15 opinion, a private loan is excepted from discharge under Section 523 a 8 B only if it was “made to individuals attending eligible schools for certain qualified expenses.”