5th Circuit Joins the Growing Crowd Holding that Private Student Loans May be Dischargeable in Bankruptcy

The Fifth Circuit’s recent decision in Crocker v. Navient Solutions is a stark reminder to for-profit student lenders and servicers that bankruptcy caselaw continues to evolve relating to discharge. In Crocker, the Fifth Circuit joined the trend of cases holding that private student loans are dischargeable in bankruptcy. More specifically, the court affirmed a bankruptcy decision by the Southern District of Texas that private educational loans are not statutorily excepted from discharge, absent undue hardship (in other words, it held that such loans can be discharged like other debt).

The case involved two individual chapter 7 bankruptcy filings in different jurisdictions. The first filing involved a debtor who obtained a $15,000 loan from Navient Solutions, a for-profit public corporation lender not part of any governmental loan program. The second filing was by a debtor who had obtained an $11,000 loan from Navient to attend technical school. In both cases, the bankruptcy courts issued standard discharge orders and closed the cases. After the discharges, Navient continued collection efforts on the loans, which prompted one of the debtors to file an adversary proceeding, later filing an amended complaint joining the second debtor as an additional plaintiff and seeking to certify a nationwide class, which had the potential to exponentially increase both the number of plaintiffs in the case as well as Navient’s potential liability. The bankruptcy court denied Navient’s motion for summary judgment, determining that the particular category of loans was not exempt from discharge under 11 U.S.C. § 523(a)(8). Two issues were addressed on appeal: 1) whether the bankruptcy court had jurisdiction to enforce the discharge injunction from another court (ultimately concluding it did not), and 2) whether these loans are within the category of loans that are non-dischargeable under the Bankruptcy Code.

The Fifth Circuit agreed with the bankruptcy court that private educational loans are subject to discharge. Section 11 U.S.C. § 523(a)(8)(A)(ii) of the Bankruptcy Code provides:

(8) unless 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 by 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. (emphasis added)

The court began its analysis by noting that exceptions to discharge should be interpreted narrowly in favor of the debtor. The relevant statutory section ((A)(ii)) did not include the word “loan” in contrast to section (A)(i). Contrary to Navient’s assertions, the language in the relevant section “obligation to repay funds received by an educational benefit” should not be construed to apply to private student loans. Instead, the term “educational benefit” is more akin to the other terms in section (A)(ii), scholarship and stipend, which “signify granting, not borrowing.” The court further found that if section (A)(ii) included repaying private student loans as an “educational benefit,” section (A)(i) would be redundant and contrary to the canon against surplusage. Absent the narrower reading, “Congress could have just exempted from discharge any ‘obligation to repay funds received as an educational benefit’ and left it at that.” Finally, the court discussed the statutory history of section 523(a)(8) and concluded that the 2005 bankruptcy amendments did not make all private student loans non-dischargeable.

One issue the court felt it had to explain was the potential inconsistency of its conclusion with its recent statement in Thomas v. Dept. of Ed. that “Section 523(a)(8) as it stands today excepts virtually all student loans from discharge” unless undue hardship is shown. To harmonize Thomas and Crocker, the court reasoned that Crocker addressed a type of loan that, unlike the loan in Thomas, was not governed by Section 523(a)(8). The basis of the distinction between the two loans was, according to the court, that “an educational benefit” is limited to conditional payments with similarities to scholarships and stipends. In other words, in contrast to the Thomas debt, the Crocker debt, despite being obtained to pay expenses of education, did not qualify as “an obligation to repay funds received as an educational benefit, scholarship, or stipend” because repayment was unconditional. Therefore, in the court’s opinion, the Crocker debt was not subject to Section 523(a)(8) and therefore was dischargeable without creating any conflict between Thomas and Crocker.

Private student lenders should continue to monitor the increasing caselaw and developments regarding debtor’s ability to discharge certain private student loans (see e.g., Nypaver v. Nypaver, 581 B.R. 431 (W.D. Pa. 2018); McDaniel v. Navient Sols., LLC, 590 B.R. 537 (Bankr. D. Colo. 2018).