Private Student Loans in Bankruptcy

Some private student loans can be discharged in bankruptcy without proving undue hardship. Whether yours can turns on a single question: is the loan a “qualified education loan” that Congress protected under 11 U.S.C. § 523(a)(8)? If it is, discharge requires the same undue-hardship showing as a federal loan. If it is not, the loan can be wiped out like an ordinary credit card or personal loan. Many private loans are less protected than borrowers, and lenders, assume.

This is the most misunderstood corner of student loan bankruptcy. “You can never discharge student loans” is repeated so often that borrowers with dischargeable private debt never ask the question. Here is the actual rule, the recent federal appeals cases that have narrowed what counts as a protected student loan, and how we figure out which category your loan is in.

The three buckets of § 523(a)(8)

Section 523(a)(8) does not say “all student loans are non-dischargeable.” It protects three specific categories of educational debt from discharge unless the borrower proves undue hardship:

• § 523(a)(8)(A)(i): loans made, insured, or guaranteed by a governmental unit, or made under a program funded in whole or in part by a government or nonprofit institution. This is the federal-loan bucket (Direct, FFEL, Perkins).
• § 523(a)(8)(A)(ii): an obligation to repay funds received as an “educational benefit, scholarship, or stipend.” Think of a conditional scholarship or a service-obligation stipend, not an ordinary loan. The classic examples are ROTC and National Health Service Corps awards that pay tuition in exchange for a promise to serve after graduation, and a GI Bill overpayment that keeps arriving after you leave school. In each case the money only becomes repayable if a condition is broken.
• § 523(a)(8)(B): any other “qualified education loan” as defined in 26 U.S.C. § 221(d)(1). This is the bucket most private student loans fall into, if they meet the definition.

A private loan is only protected from discharge if it fits one of these three buckets. If it fits none of them, it is dischargeable like any other unsecured debt, no undue-hardship adversary proceeding required.

What makes a private loan a “qualified education loan”

Most private student loans are tested under § 523(a)(8)(B), which borrows the definition of “qualified education loan” from the tax code, 26 U.S.C. § 221(d). To be a qualified education loan, the debt has to be incurred solely to pay qualified higher education expenses, which means the cost of attendance at an eligible institution (generally a school eligible for federal Title IV aid), for an eligible student, within a reasonable period of the enrollment.

Each of those requirements is a place a private loan can fall out of the definition, and out of § 523(a)(8) protection:

• Loans that exceed the cost of attendance. If a lender advanced more than the school’s certified cost of attendance, the excess was not “solely” for qualified expenses. Direct-to-consumer loans that were deposited into the borrower’s bank account, rather than paid to the school, are a common example.
• Loans for a non-eligible school or program. If the school was not Title IV eligible, or lost eligibility, a loan for attendance there may not qualify.
• Loans for a student enrolled less than half-time, or for non-degree programs that do not meet the eligible-student or eligible-expense requirements.
• Loans that are not for “higher education” expenses at all, such as bar-exam study loans and some career-training or bootcamp financing, which several courts have treated as ordinary consumer loans rather than qualified education loans.

The recent case law: courts are narrowing what counts

Over the last several years, federal appeals courts have pushed back on lenders’ broad claim that every private student loan is automatically non-dischargeable. Two decisions are the leading examples:

• Homaidan v. Sallie Mae, Inc., 3 F.4th 595 (2d Cir. 2021), held that § 523(a)(8)(A)(ii), the “educational benefit” bucket, does not sweep in ordinary private tuition loans. Lenders had argued that a private student loan was an “obligation to repay funds received as an educational benefit”; the Second Circuit rejected that reading, so a private loan that is not a qualified education loan under (B) is not saved by (A)(ii) either.
• Crocker v. Navient Solutions, L.L.C., 941 F.3d 206 (5th Cir. 2019), reached a similar conclusion, holding that the “educational benefit” language does not cover a private loan of that kind.

An honest, important caveat for Pennsylvania and New Jersey. Those decisions come from the Second and Fifth Circuits. They are not binding on the Third Circuit, which covers Pennsylvania and New Jersey, and the Third Circuit has not squarely decided the private-loan “educational benefit” question in a controlling published opinion. Bankruptcy judges here can find that reasoning persuasive, but it is not automatic law in our courts. That is exactly why this is a case-by-case argument built on your specific loan documents, and why we will give you an answer rather than a promise.

Which private loans can be discharged without an adversary proceeding?

Some private education debt is wiped out by an ordinary bankruptcy discharge, the same way a credit card is, with no undue-hardship case required. That happens when the loan fits none of the three § 523(a)(8) categories, so there is nothing to litigate and no need for an adversary proceeding (the separate lawsuit filed inside your bankruptcy where a judge decides whether one particular debt survives).

Federal appeals courts have now published decisions on loans in that outside-the-exception group. These are the patterns that keep showing up:

• Bar exam study loans. In the Fifth Circuit case the page describes above, the borrower had taken a $15,000 loan in 2009 purely to pay for bar exam preparation. The court held it dischargeable, because the “educational benefit” category reaches only conditional payments that resemble scholarships and stipends, and repayment of his loan was unconditional. The lender did not claim it was a qualified education loan.
• Loans for a school outside the federal aid system. The second borrower in that same case had borrowed $11,658.99 for tuition and expenses at a technical school, and the proposed class was defined around loans for schools not accredited under Title IV. Title IV matters because § 523(a)(8)(B) only protects a loan for attendance at an “eligible educational institution,” which the tax code defines as a school eligible to take part in the federal Title IV student aid programs. The Second Circuit stated that requirement directly in Homaidan.
• Money that went to you instead of the school, and ran past the cost of attendance. The two loans in Homaidan totalled $12,567, were not made through the college’s financial aid office, went straight into the borrower’s bank account, and exceeded the cost of his tuition. The Second Circuit held that the “educational benefit” category does not sweep in ordinary private student loans, and affirmed the denial of the lender’s motion to dismiss. That was a ruling on what the statute means, not a final judgment that his loans were gone.
• A loan from a close family member. The tax-code definition § 523(a)(8)(B) borrows expressly excludes “any indebtedness owed to a person who is related (within the meaning of section 267(b) or 707(b)(1)) to the taxpayer …” That cross-reference is narrower than “family” in everyday speech. The statute says it covers “only” a spouse; a parent, grandparent or other direct ancestor; a child, grandchild or other direct descendant; and a brother or sister. So money your parents lent you for school is not a qualified education loan, while money from an aunt, an uncle, a cousin, or an in-law is outside that exclusion and has to be looked at on its own terms. Either way the other two categories still get checked.

One thing that is not on this list: a loan from your 401(k) or another retirement plan at work. That is also excluded from the qualified-education-loan definition, but a separate part of the same statute, § 523(a)(18), excepts retirement-plan loans from discharge on its own. Getting out of the student loan exception does not get you out of that one.

The caveat in the section above still applies to all of it. Those decisions come from the Second and Fifth Circuits, not from the Third Circuit that covers Pennsylvania and New Jersey.

And one honest note about the phrase “without an adversary proceeding.” If the loan is outside § 523(a)(8), you do not have to prove undue hardship to be rid of it. What you may still have to do is get the lender to accept that. Both of the cases above reached a federal appeals court because the borrowers had already received their discharges and the servicer kept demanding payment anyway. One of them paid his loans off in full first, then reopened his bankruptcy case to establish that they had been discharged all along. Sorting this out while your case is open is almost always the cheaper path.

What counts as cost of attendance, and how does a loan run past it?

Cost of attendance is the school’s own certified figure for what a year there costs, and it is a lot broader than tuition. Describing the same definition that decides this question, the Sixth Circuit listed what it covers in a 2020 decision, Conti v. Arrowood Indemnity Co.: tuition and fees, room and board, books, materials, supplies, transportation, and miscellaneous personal expenses, in amounts the university sets.

So the common hope that “I spent the money on rent, so it was never really a student loan” does not work by itself. Living costs sit inside cost of attendance when the school puts them there. The same decision made the point from the other direction, and the borrower there lost: what matters is the loan’s purpose when it was taken out, not what the money was actually spent on, and that purpose is read mainly out of the loan agreement.

The number that matters is also smaller than the sticker figure. The tax-code definition treats “qualified higher education expenses” as cost of attendance at an eligible school reduced by scholarships, grants, and similar tax-free education assistance (26 U.S.C. § 221(d)(2)). A loan is only a qualified education loan if it was incurred solely to pay that reduced amount.

What the Sixth Circuit found decisive is worth knowing, because it tells you what to look for in your own file. Those loan applications tied each loan to the borrower’s enrollment at the university for a given academic year. They capped the amount at “the full cost of education less any financial aid you are receiving.” They limited use of the money to “specific educational expenses.” They carried a block for the school’s financial aid office to certify all of that. The lender disbursed to the school directly, and no loan exceeded cost of attendance minus her Pell grant. Those facts together made her loans qualified education loans, so they came through her bankruptcy intact.

Read that in reverse and you have the loan worth a second look: paperwork that does none of those things, money that landed in your account rather than the bursar’s, and a balance that ran past the certified figure once your grants are subtracted. That is not an automatic answer. It is the file that deserves a real read.

If your private loan IS a qualified education loan

A private loan that does meet the § 221(d) definition sits inside § 523(a)(8) and is discharged only on the same undue-hardship showing that applies to federal loans. There is no DOJ attestation shortcut for private lenders, so that means proving all three prongs of the Third Circuit’s Brunner test the traditional way. See how the Brunner undue-hardship test works. Even then, a private-loan discharge is realistic for borrowers whose facts fit, and clearing the rest of your debt in the same bankruptcy can make an unaffordable private loan payment manageable regardless.

Who has to prove your private loan is not dischargeable?

The lender does, not you. Getting a debt out of your discharge is the creditor’s job to prove, so you are not required to prove a negative about a loan you took out at nineteen. The flip side matters just as much: if the lender does show your loan sits in one of the § 523(a)(8) categories, proving undue hardship is then your burden, which is what makes the sorting question on this page worth so much.

The Third Circuit, which covers Pennsylvania and New Jersey, put the first half plainly. In In re Mehta, 310 F.3d 308 (3d Cir. 2002), the Court of Appeals said exceptions to discharge are “construed narrowly against the creditor and in favor of the debtor,” and that “the creditor opposing discharge therefore has the burden of establishing that an obligation is not dischargeable.” The Second and Sixth Circuit decisions on private student loans start from the same rule.

Mehta is worth knowing for a second reason, if what you owe is the school rather than a lender. The Third Circuit held there that an unpaid tuition balance at Boston University was neither a “loan” nor an “educational benefit” under § 523(a)(8), and could be discharged. What would have changed the result was a real credit agreement: a promissory note (the contract in which you promise to repay), or money that actually changed hands. A tuition account you simply stopped paying is not the same thing as a student loan. That decision came down in 2002, before Congress added the qualified-education-loan category in 2005, so it does not answer the private-lender question. It does tell you how our circuit reads this statute.

If your private loan does land inside § 523(a)(8), the route is the same lawsuit federal borrowers use, with two differences. The defendant is the lender or its servicer instead of the United States, and there is no attestation shortcut to lean on. Our page on the student loan adversary proceeding walks through that case start to finish, and the DOJ attestation process is the federal-loan track it gets compared to.

How we figure out which bucket your loan is in

Sorting a private loan is a documents question. We look at the promissory note and the loan’s marketing, how and to whom the money was disbursed, the school’s Title IV eligibility during your enrollment, the certified cost of attendance for that period, and your enrollment status. Those records decide whether the loan is a qualified education loan protected by § 523(a)(8) or an ordinary debt you can discharge. Whichever way it falls, filing itself starts with the current numbers: see our current PA and NJ bankruptcy figures. If the loan is dischargeable, we say so; if it is not, we tell you that too, and turn to the undue-hardship path or to what bankruptcy can still do for the rest of your debt.

What in your loan paperwork decides the answer?

Five documents decide it, and you probably already have most of them: the promissory note (the contract where you promised to repay), the loan application, the disbursement record showing who received the money, the school’s certified cost of attendance for the years you were enrolled, and your financial aid award letters. Courts read a loan’s purpose out of that paperwork rather than out of anyone’s memory of how the money got spent.

Here is what we are looking for in each:

• Does the note or application cap the amount at the cost of education less other aid, and is there a school certification block? The Sixth Circuit treated both as strong evidence of a qualified education loan.
• Where did the money go? Disbursed to the school is one story. Deposited in your checking account, outside the financial aid office, is another. That was the fact pattern in Homaidan.
• Was the school taking part in federal Title IV student aid while you were enrolled? The definition requires an “eligible educational institution,” and Title IV participation is what that means. Schools lose eligibility, and the years matter.
• Were you enrolled at least half time? “Eligible student” borrows a tax-code definition that requires carrying at least half of a normal full-time workload.
• Who signed, and for whom? The definition covers debt incurred on behalf of the borrower, the borrower’s spouse, or a dependent at the time the debt was taken on. Being the co-signer is not by itself a way out here: the Third Circuit held in 1993 that § 523(a)(8) reached a parent who co-signed notes for her children’s education, in a case about government-backed loans, so her debt survived her bankruptcy.
• Did you refinance or consolidate? That does not shed the label. The statute says the term includes debt “used to refinance indebtedness which qualifies as a qualified education loan.”

One thing not to worry about: never receiving an IRS Form 1098-E, or never filing a certification form, does not make a loan non-qualified. A borrower argued exactly that to the Sixth Circuit and lost.

If you have the note and the award letters, bring them and we will read them against the statute with you in your free consultation.

A note on Philadelphia & South Jersey practice

Private-loan dischargeability disputes are litigated as adversary proceedings in the U.S. Bankruptcy Court for the Eastern District of Pennsylvania (Philadelphia) or the District of New Jersey, Camden vicinage (South Jersey). The defendant is the private lender or its servicer, not the government, so the DOJ attestation framework does not apply. How a given judge reads the out-of-circuit case law can shape strategy, which is one more reason the analysis starts with your documents.

Talk to a bankruptcy lawyer who serves Philadelphia & South Jersey

The Law Office of Mike Assad helps individuals across Philadelphia and South Jersey read their private loans against § 523(a)(8) and, where the facts support it, pursue discharge. Mike is admitted in both Pennsylvania and New Jersey and handles cases through the U.S. Bankruptcy Court for the Eastern District of Pennsylvania and the District of New Jersey. Start with our overview of student loan discharge.

• A free, confidential consultation with no obligation, and an answer on whether your private loans fall inside or outside § 523(a)(8).
• Affordable pricing where the case structure allows, with payment plans available. A $999 Chapter 7 program for qualifying filers.
• The same lawyer on your case from the first call through the discharge order, and a live person on the phone when you call.
• Fully virtual representation by phone and Zoom, so you never have to come to an office.

Book your free consultation online. The firm has offices in Cherry Hill, New Jersey, Egg Harbor Township, New Jersey, and Philadelphia, Pennsylvania. If it would help, you can share your debt picture before the call so the consultation starts from the facts.

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