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In Homaidan v. Sallie Mae, Inc. (In re Homaidan), 2021 U.S. App. LEXIS 20934, 2021 WL 2964217, (2d Cir. July 15, 2021), the Second Circuit Court of Appeals upheld the U.S. Bankruptcy Court, EDNY’s decision to allow a private student loan to be discharged because the private loans did not constitute an obligation to repay funds received as an “educational benefit.”
The Second Circuit Court of Appeals affirmed the bankruptcy court's denial of the lender's motion to dismiss after concluding that section 523(a)(8)(A)(ii)—which excepts from discharge “an obligation to repay funds received as an educational benefit, scholarship, or stipend”—does not cover private student loans; and allowed a bankruptcy debtor to discharge his private student loans.
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The Second Circuit Court’s ruling reasoned that: “Interpreting ‘“educational benefit” to cover all private student loans when the two terms listed in tandem describe ‘“specific and quite limited kinds of payments that . . . do not usually require repayment,”’ In re Crocker, 941 F.3d at 220, would improperly broaden § 523(a)(8)(A)(ii)’s scope.”
Specifically, the Second Circuit Court, stated:
“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.” Per § 523(a)(8)(A)(ii), that obligation cannot be discharged in bankruptcy.
Homaidan v. Sallie Mae, Inc. (In re Homaidan), 2021 U.S. App. LEXIS 20934, 2021 WL 2964217, at *15 (2d Cir. July 15, 2021).
