Certain Private Student Loans may be Dischargeable in Bankruptcy

By: Cristian Catanese

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff


In McDaniel v. Navient Solutions, the United States Court of Appeals for the Tenth Circuit held that a debtor’s obligation to repay certain private student loans may be discharged in bankruptcy without a showing of undue hardship.[1] In 2009, Mr. and Mrs. McDaniels (the “Debtors”) filed a voluntary petition for relief under Chapter 13 of the United States Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the District of Colorado.[2]  The Debtors filed schedules reflecting that they had eleven student loans totaling almost $200,000, six of which were private “Tuition Answer Loans” issued by Navient Solutions, LLC (“Navient”).[3] The court confirmed the Debtors’ plan, pursuant to which the student loan payments would be deferred until the remaining debts were paid.[4] In 2015, after certifying completion of the bankruptcy plan, the bankruptcy court issued an order discharging the Debtors without specifying which loans were included in the discharge.[5] Following payment towards the non-discharged principal, the Debtors obtained an order reopening their bankruptcy cases and filed a complaint against Navient seeking (1) a declaratory judgment that the Debtors’ student loans were discharged in bankruptcy, and (2) damages arising from discharge violations.[6] Navient moved to dismiss the complaint by first arguing that the matter was res judicata because the private loans were excepted from bankruptcy under the plan.[7] Additionally, Navient argued that even if they were not excluded from the plan, the loans were nonetheless nondischaregeable under 11 U.S.C. §523(a)(8)(A)(ii) because they were “an obligation to repay funds received as an educational benefit.”[8] The bankruptcy court denied the motion on both grounds, holding that the term “educational benefit” under §523(a)(8)(A)(ii) does not include educational loans.[9]  The case was appealed directly to the Court of Appeals for the Tenth Circuit, and the court addressed both arguments.[10]

The Court of Appeals dismissed Navient’s res judicata claim after acknowledging that the discharge order failed to specify which student loans were discharged.[11] The appeals court then addressed whether Navient’s private loan qualified as an “educational benefit” under §523(a)(8)(A)(ii).[12]  According to the appeals court, the private loan was not an educational benefit.[13]

In reaching its conclusion, the Court of Appeals emphasized that the three exceptions to bankruptcy discharge under section §523(a)(8)(A) should be construed narrowly in favor of the debtor, consistent with the policy to provide debtors with a “fresh start.”[14] Furthermore, applying the principals of statutory construction, the court determined that private loans do not qualify as an “educational benefit” under §523( a)(8)(A)(ii).[15] First, the court noted that under §523(a)(8)(A)(i), Congress separated “educational benefit” and “loan made” so as to intentionally distinguish the two definitions.[16] Second, the court reasoned that Congress omitted the term “educational loan” from §523(a)(8)(A)(ii) intentionally because the term was included in other exceptions.[17]  The court further interpreted “educational benefit” to be more akin to “scholarship” or “stipend.”[18] Finally, the court distinguished “educational benefits,” “stipends,” and “scholarships” from “loans” by reasoning that these terms refer to conditional grants of money, whereas loans are simply funds that must be repaid.[19]

According to the Tenth Circuit, because Navient’s loans did not qualify as an “educational benefit” under the statute, the loans were discharged under the McDaniels’ Chapter 13 bankruptcy.[20] Indeed, Navient’s loans were akin to credit card debt to buy textbooks, which is dischargeable.[21] In doing so, the Court in Navient provided clarity to the longstanding precedent that all student loans were presumptively nondischargeable absent undue hardship.[22]

[1] In re McDaniel, 973 F.3d 1083, 1104 (10th Cir. 2020) (“the bankruptcy court did not err in ruling that § 523(a)(8)(A)(ii) does not except student loans from discharge and, consequently, that the exception does not cover the McDaniels' Tuition Answer Loans.”)

[2] In re McDaniel, 590 B.R. 537, 540 (Bankr. D. Colo. 2018) (“On December 24, 2009, Debtors filed a voluntary Chapter 13 case and plan, using the standard form (Case No. 09-37480, Docket # 2).”)

[3] In re McDaniel, 973 F.3d at 1086 (“They acknowledged that they had, among other debts, eleven accounts with Sallie Mae, owing about $200,000 on them.”)

[4] See Id. at 1090 (“[s]tudent loans are to be treated as an unsecured Class Four claim or as follows: deferred until end of plan.”)

[5] See Id. at 1087–88 (“[I]t simply stated that ‘[d]ebts for most student loans’ were not discharged.”)

[6] Id. at 1088.

[7] Id.

[8] In re McDaniel, 973 F.3d at 1088.

[9] Id. (Rejecting the res judicata argument because the plan did not specify which loans were discharged, and the statutory argument on the grounds that the language of §523(a)(8)(A)(ii) “establishes that educational loans are not obligations to repay funds received as an educational benefit.”)

[10] See Id.

[11] Id. at 1091 (“[W]e agree with the bankruptcy court that because the McDaniels' confirmed Chapter 13 plan does not say whether their students loans are excepted from discharge, the issue is not res judicata under that plan.”)

[12] Id at 1092.

[13] In re McDaniel, 973 F.3d at 1092.

[14] Id. at 1093–94.

[15] Id. at 1095–98

[16] Id. at 1095.

[17] Id. (“If Congress had wanted the exception set forth in § 523(a)(8)(A)(ii) to cover student loans, we presume it would have used the term “educational loan” or an iteration thereof in that provision, just as it used the term in defining the scope of the exceptions in the statute's adjoining subsections.”)

[18] In re McDaniel, 973 F.3d at 1097. The court applied the canon of noscitur a sociis, which instructs that a word should be interpreted within the context of its surrounding words. Id. (“This canon . . . instructs that ‘a word is known by the company it keeps . . . .’) quoting Jarecki v. G. D. Searle & Co., 367 U.S. 303, 307 (1961)

[19] Id. at 1094 (10th Cir. 2020) (“‘funds received as an educational benefit’” does not include student loans because each of the terms in the series “educational benefit, scholarship, or stipend” signify conditional grants of money that generally need not be repaid by their recipients, whereas loaned money must be repaid.”)

[20]  See Id. at 1104 (“[t]he exception does not cover the McDaniels' Tuition Answer Loans.”)

[21]  Id. at 1103 (“But if any funds that help a person meet “the costs of education” were to constitute funds received as an educational benefit, Navient's reading of the statute would be exceedingly broad—swallowing, among other things, any credit–card debt used to buy textbooks, as the McDaniels observe. Aplees.”)

[22] The court stated that the presumption that all student loans are nondischargeable in bankruptcy was due in part to other courts misconstruing the Supreme Court’s broad statement in United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 277 n.13 (2010), stating that “[s]ection 523(a)(8) renders student loan debt presumptively nondischargeable ‘unless’ a determination of undue hardship is made.” Id. at 1099–100 That statement was intended as shorthand rather than an explicit judicial declaration. Id.