Wednesday, July 21, 2021

Second Circuit Says Student Obligation Was Not Excepted From Discharge

Congress has made it very difficult to discharge a student loan. However, as illustrated by a recent decision from the Second Circuit, not all obligations owed by students in connection with their schooling are excepted from discharge. Homaidan v. Sallie Mae, Inc., 2021 U.S. App. LEXIS 20934 (2nd Cir. 7/15/21).

What Happened

Hilal Homaidan attended Emerson College from 2003-2007. He took out two “direct-to-consumer Tuition Answer Loans, totaling $12,567, from Sallie Mae, Inc.” These loans were not made through Emerson’s financial aid office nor, according to Homaidan, were they made solely to cover the cost of attending college. Homaidan filed bankruptcy and received a discharge.

Navient hired a collection firm “to pester Homaidan about paying back his Tuition Answer Loans.” Homaidan assumed that if Navient was trying to collect from him, the debt must have been excluded from discharge and he paid back the loans. In 2017, he reopened his case and brought suit against Navient for violation of the discharge.

Navient moved to dismiss the adversary proceeding on the basis that the loans were non-dischargeable. Judge Elizabeth Strong denied the motion to dismiss and an interlocutory appeal followed. The Second Circuit affirmed.

The Court’s Ruling

According to the Second Circuit, there are three types of student obligations which are non-dischargeable:

(1) loans and benefit overpayments backed by the government or a nonprofit; (2) obligations to repay funds received as an educational benefit, scholarship, or stipend; and (3) qualified private educational loans.

Navient argued that the loans constituted an educational benefit, conceding that neither the first nor the third category applied. Homaidan argued that educational benefits referred to a narrow category of conditional grant payments rather than all private student loans.

The Second Circuit found that Navient’s construction tortured the English language. It quoted a Tenth Circuit decision that said that “no normal speaker of English . . . would say that student loans are obligations to repay funds received as an educational benefit.” In re McDaniel, 973 F.2d 1083 (10th Cir. 2020).

The Court used the canon of noscitur a sociis, “the canon that counsels that a word is given more precise content by the neighboring words with which it is associated.” 11 U.S.C. Sec. 523(a)(8)(ii) refers to “an obligation to repay fund received as an educational benefit, scholarship, or stipend.” The Court reasoned that “educational benefit” must be similar to scholarship or stipend. It ultimately concluded that:

"Educational benefit" is therefore best read to refer to conditional grant payments, similar to scholarships and stipends. The Reserve Officer Training Corps and the National Health Service Corps, for example, pay tuition in exchange for a promise to serve in the military after graduation or to practice medicine in an underserved region. See Jason Iuliano, Student Loan Bankruptcy and the Meaning of Educational Benefit, 93 AM. BANKR. L.J. 277, 292 (2019). A recipient who breaks that promise incurs an "obligation to repay [the] funds" that they previously received "as an educational benefit."   

Opinion at *15.


This decision can have far-ranging consequences for Navient and other creditors who sought to collect Tuition Answer Loans after discharge. Attempting to collect, or actually collecting as happened here, is a violation of the discharge. This leaves Navient exposed to damages in this case and similar cases. 

Navient had to resort to legal gymnastics because the two main clauses of Sec. 523(a)(8), while quite broad, have very definite meanings. Loans backed by the government or non-profits cannot include private student loans. Private student loans may be non-dischargeable, but only if they are “qualified student loans” under the Internal Revenue Code. That means that any lender which cannot establish one of the main exceptions to dischargeability is left to argue that the debt is an obligation to repay funds received as an educational benefit, scholarship or stipend.

As bad as this result, was, future cases may be worse. There is now a developing body of law as to what does not constitute an obligation to repay an educational benefit. In addition to this opinion from the Second Circuit and the Tenth Circuit’s McDaniel decision, the Fifth Circuit ruled against Navient in Crocker v. Navient Solutions, LLC (In re Crocker), 941 F.3d 206 (5th Cir. 2019) in a case involving a loan made in connection with a program to study for the bar exam. Given the trend in the law, students with unconventional loan products should be able to expect an easier time establishing that their debt was discharged. Conversely, lenders making arguments that “no normal speaker of English” would make could find themselves in an uncomfortable position.

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