What is a "Qualified Education Loan" in Bankruptcy?

Here's another twist on the current consensus that student loans are not dischargeable in bankruptcy. What if the loan taken is not even considered a student loan for the purpose of bankruptcy? In order to be considered a "qualified education loan", an education loan must satisfy all of the following requirements:

a. The debt must be incurred "by a debtor who is an individual", per 11 USC 523(a)(8)(B).

b. The debt must be "incurred solely to pay qualified higher education expenses", per 26 USC 221(d)(1) by cross-reference from 11 USC 523(a)(8)(B). Mixed used loans, such as credit card debt or home equity loans, are not eligible, per example 6 of 26 CFR 1.221-1(e)(4). Even education loans are not eligible if they are incurred to pay for expenses other than qualified higher education expenses.

c. The debt must be incurred on behalf of a student who is either the debtor, the debtor's spouse, or the debtor's dependent (eligible to be claimed as an exemption on the debtor's income tax return, per 26 CFR 1.221-1(b)(2)) at the time the indebtedness was incurred, per 26 USC 221(d)(1)(A) by cross-reference from 11 USC 523(a)(8)(B).

d. The debt must be "paid or incurred within a reasonable period of time before or after the indebtedness is incurred", per 26 USC 221(d)(1)(B) by cross-reference from 11 USC 523(a)(8)(B). The regulations at 26 CFR 1.221-1(e)(3)(ii)(B) provide for a safe harbor of 90 days before or after the academic period to which the expenses relate. It is possible that a longer period of time would still be considered reasonable based on the relevant facts and circumstances, per 26 CFR 1.221-1(e)(3)(ii), but use of a loan to pay for a previous year's school charges would generally not qualify unless there were extenuating circumstances.

e. The debt must be "attributable to education furnished during a period during which the recipient was an eligible student" per 26 USC 221(d)(1)(C) by cross-reference from 11 USC 523(a)(8)(B). To be an eligible student, the student must be enrolled at least halftime in a Title IV institution and be degree-seeking. Study abroad is only eligible to the extent that it is approved for credit by the home institution.

There is a two-tiered analysis: first, whether a debt is an educational " loan " and, if it is, then whether it meets the Internal Revenue Code definition of "qualified education loan," In re Oliver, 499 B.R. 617 (Bankr. S.D. Ind., 2013); see also, Inst. of Imaginal Studies v. Christoff (In re Christoff) (Bankr. N.D. Cal., 2014).

A. Is the Debt a "Loan?"

The Debtor in this case does not dispute that she co-signed on a loan to pay for her then minor child to be placed in a residential treatment facility that accepted such "educational loans" as payment for its services.

Debtor acknowledges that she never received any of the funds disbursed pursuant to the Non-Negotiable Credit Agreement executed and the funds, if any, were sent directly to YouthCare.

B. Was the Loan a Qualified Education Loan Pursuant to 11 U.S.C. §523(a)(8)(B)?

Under § 523(a)(8), the lender has the initial burden to establish the existence of the debt and that the debt is an educational loan within the statute's parameters. Lavy v. U.S. Dep't of Educ. (In re Lavy), 2008 WL 4964721, at *3 (Bankr.W.D.Wash. Nov. 14, 2008); Roth v. Educ. Credit Mgmt. Corp. (In re Roth), 490 B.R. 908 (B.A.P. 9th Cir., 2013)

For purposes of this section, a "qualified education loan" is defined as:

(1) Qualified education loan. — The term "qualified education loan" means any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses —

(A) which are incurred on behalf of the taxpayer, the taxpayer's spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,

(B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and

(C) which are attributable to education furnished during a period during which the recipient was an eligible student.

Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan.

26 U.S.C. § 221(d)(1).

"Qualified higher education expenses" are defined as:

(2) Qualified higher education expenses. — The term "qualified higher education expenses" means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997) at an eligible educational institution[.]

26 U.S.C. § 221(d)(2).

The "cost of attendance" for a student in the debtor's situation means:

(1) tuition and fees normally assessed a student carrying the same academic workload as determined by the institution, and including costs for rental or purchase of any equipment, materials, or supplies required of all students in the same course of study;

(2) an allowance for books, supplies, transportation, and miscellaneous personal expenses, including a reasonable allowance for the documented rental or purchase of a personal computer, for a student attending the institution on at least a half-time basis, as determined by the institution;

(3) an allowance (as determined by the institution) for room and board costs incurred by the student which —

(A) shall be an allowance determined by the institution for a student without dependents residing at home with parents;

(B) for students without dependents residing in institutionally owned or operated housing, shall be a standard allowance determined by the institution based [Page 5] on the amount normally assessed most of its residents for room and board; and

(C) for all other students shall be an allowance based on the expenses reasonably incurred by such students for room and board[.] 20 U.S.C. § 1087.

In re Noland, Case No. BK09-80873-TJM (Bankr.Neb. 3/30/2010) (Bankr.Neb., 2010)

What is a 'qualified educational institution'? Basically that is a post-secondary school authorized to participate in the U.S. Department of Education Student Loan program. The formal definition is found in 26 USC 25A(f)(2): "Eligible educational institution - The term "eligible educational institution" means an institution - (A) which is described in section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088), as in effect on the date of the enactment of this section, and (B) which is eligible to participate in a program under title IV of such Act."

Page 37 of IRS publication 970 describes an eligible educational institution as "any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions.

Section 221(d)(1) of the Internal Revenue Code defines a qualified education loan as "any indebtedness incurred . . . to pay qualified higher education expenses . . . on behalf of the taxpayer, the taxpayer's spouse, or any dependent of the taxpayer." The term "qualified higher education expenses" is further defined as "the cost of attendance . . . at an eligible educational institution." An "eligible educational institution" has the same meaning given such term by section 25A(f)(2)of the Internal Revenue Code. An eligible educational institution is that which is described and eligible to participate in a program under Title IV of the Higher Education Act of 1965, as amended. 26 U.S.C. §25A(f)(2). Wills v. Sallie Mae; (Bankruptcy Court S. D. Ind. 4-23-2010; Case #08-80404, Adversary Proceeding #08-58043; decision April 23, 2010)

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