Wednesday, April 11, 2018

MarketWatch: Class-action lawsuit against student loan giant brings hope to borrowers in bankruptcy

By Jillian Berman

A recent court ruling may offer hope for thousands of struggling borrowers looking to escape education-related debts.

A Texas bankruptcy judge denied a request by student loan company, Navient, last month to dismiss a class-action lawsuit accusing the firm of illegally collecting on loans that were discharged in bankruptcy. Navient is appealing.

Patricia Christel, a spokeswoman for the Navient, declined to comment on pending litigation, but noted in an email that the company supports reform “that would allow federal and private student loans to be dischargeable in bankruptcy for those who have made a good-faith effort to repay their student loans over a five-to-seven year period and who still experience financial difficulty.”

The decision last month means the case can move forward and it also offers the opportunity for an appellate court to weigh in on whether loans historically viewed as exempt from bankruptcy discharge can actually be wiped away in the process.

“This is one to watch for potential,” said John Rao, an attorney at the National Consumer Law Center and expert on consumer bankruptcies.

The ruling comes as lawyers across the country are increasingly looking to challenge the conventional wisdom that any type of student loan isn’t dischargeable in bankruptcy. It also comes as the Department of Education is reviewing the high standard student loan borrowers must meet in order to have their debts discharged in bankruptcy.

This case centers around a very specific type of debt — and a small share of Navient’s private loan portfolio — money loaned to borrowers to pay for unaccredited programs, such as bar exam study courses and K-12 educational expenses. The lawyers representing the class estimate that about 16,000 borrowers fall into this category, according to Austin Smith, one of those attorneys.

But if the appellate court rules in favor of the plaintiffs that could indicate that borrowers with similar loans from other companies could also be entitled to relief. “If I were advising other companies who have these loans and have taken similar positions as Navient — I would be worried,” said Dalié Jiménez, a professor of law at the University of California-Irvine’s School of Law.
 
Reasons for student loans to be exempt from discharge in bankruptcy

To discharge a loan in bankruptcy, they must fall into one of four categories:
1. A federal student loan.
2. A student loan made by a qualified nonprofit (say, by a school).
3. A qualified education loan, which could be made by a for-profit company, but would need to be made for qualified educational expenses; in other words, those incurred at an accredited program for the cost of attendance.
4. Funds received as an “educational benefit.”

Traditionally, bankruptcy courts have determined that the types of loans in question in this case can’t be discharged because they were received as an “educational benefit.” But recently, lawyers and judges have started to question whether loans to help borrowers study for the bar and other similar debts truly fit into that category.

“It does definitely reflect a trend of this kind of decision,” Rao said of the recent ruling.

In his order, the judge argues that the phrase “educational benefit,” likely refers to something different from simply a loan used for educational expenses. And, instead, refers to arrangements like money fronted by an employer for a worker to attend college that would need to be repaid if that employee leaves their job.

“By its use throughout [the provision], Congress was certainly aware of the term “loan” and is presumed to have made a conscious decision of when to use it and when to choose something different,” the order reads.
 
The legislative history of funds with ‘educational benefit’ 
 
That rationale appears to be in line with the legislative history of the educational benefit term, according to a recent paper by Jason Iuliano, a fellow at the University of Pennsylvania School of Law. The paper argues that — by viewing funds received for educational benefit to mean loans — judges have been interpreting the educational benefit language too broadly.
 
Iuliano notes that during congressional hearings around the time the language was added, an expert explained to members of Congress that it was meant to only exempt conditional grants from being discharged in bankruptcy.
 
“It was an effort to stop this very, very narrow category of exceptions,” Iuliano said. “It just ballooned up to cover pretty much anything you can make a case that advances one’s education.”
Judges have been using this broader interpretation in part because it’s been so rarely challenged historically, Iuliano said. Because of the popular narrative that student debt is impossible to discharge in bankruptcy, it’s extremely rare for debtors to actually attempt to do so. What’s more, lawyers have also historically shied away from representing student loan borrowers trying to discharge their debt in bankruptcy, Iuliano said.

Now that’s starting to change, said Rao. As more lawyers are beginning to challenge whether these debts are dischargeable in bankruptcy, judges are now hearing and carefully considering both arguments, he said. “Judges are not just going to automatically assume that the loan is entitled to this protection from discharge,” Rao said.

Of course, the case is far from over. And Iuliano notes that even if the judge rules in a way that’s the most favorably possible to the debtors, the ruling would still only cover a fraction of borrowers or those with these very specific types of loans from this company. Still, he said there’s reason to believe these borrowers tend to be worse off than others with student loans and so it would help those who are struggling the most.

“There’s probably a large swath of people that this applies to that they could get some fairly immediate relief,” Jiménez said.

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