We know that bankruptcy code Sect 513(a)(8) does not allow a bankruptcy debtor to receive a discharge of student loans.I have previously written about the definition of private student loans in bankruptcy and about the Supreme Court case related to discharging student loans through a chapter 13 plan.
But what about a tuition debt? If you take a class, and don't pay for it, the school is owed money, but the school didn't lend you any money, so the nature of the debt is not a loan, and therefore, is dischargeable in bankruptcy. But what about a grant overpayment?
Title IV, the federal student loan program, includes both grants and loans. Obviously, if a student does not finish school, the loans made by the government to finance the incomplete education are not discharged. But what about grants?
The Title IV program provides for repayments of grants if the student withdrawals from the school or class before it is completed. The Information for Financial Aid Professionals explains the process in great detail in their on-line handbook, but basically, if a student does not complete 60% of the courses covered by a grant, a pro-rata proportion of the grant must be returned to the government. This is called an "overpayment." And even though an overpayment of a grant is not a loan (the student did not 'borrow' the grant), it is still covered by the non-dischargeable language of the Bankruptcy Code.
Section 523(a)(8) specifically covers "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. . ." (emphasis added.) And this overpayment may be invisible to the bankruptcy debtor (the former student). If the debtor withdrawal from, say, a state college, and receives a bill from the college for unpaid tuition, it may not be at all apparent that a portion -- perhaps a large portion -- of that tuition bill is actually a grant overpayment.
The discharge of student loans is a complicated area of bankruptcy law. If you live in the Greater Rochester NY area and have questions about repaying student loans and the effect of bankruptcy, you may contact me by phone or email through my web site, scribnerbankruptcylaw.com.
I also strongly encourage anyone in the Greater Rochester area with questions about their repayment options for student loans to contact the Consumer Credit Counseling Services of Rochester at 585-546-3440 and ask for a counseling session related to student loans. There is a fee associated with that session, but it is definitely worth it.