When Is A Student Loan Not A Student Loan?

Joel Nunez had a problem – he owed $120,000 in private student loans for a flight school.

Even worse, he hadn’t finished his education. Left in dire financial straits, he went to a bankruptcy lawyer.

You’re probably thinking that Joel Nunez was a fool for thinking that he could wipe out his private student loans in bankruptcy. After all, we’ve been conditioned to think that wiping out student loans in bankruptcy is a Herculean feat that is accomplished only in the more dire of circumstances.

But Joel’s lawyer did a little digging and found the most useful of loopholes. And in doing so, he realized that Joel didn’t actually have a student loan.

Student Loans Not Automatically Wiped Out In Bankruptcy

Certain student loans aren’t automatically wiped out under the US Bankruptcy Code. But in order to qualify as a student loan, the debt must be for:

(A)(i) 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; or (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

Was It A Qualified Education Loan?

According to the court decision, Joel enrolled in Wings of the Cascades, a flight school operated by Spirit Flight, Inc., in 2004. He received two loans from Key Bank USA, National Association (“Key Bank”), a forprofit banking institution.

Key Bank thought it was lending money as a student loan. As a forprofit banking institution, the only way the debt wouldn’t be wiped out in a bankruptcy would be if it was considered a qualified education loan under the Internal Revenue Code.

Under the Internal Revenue Code, a “qualified education loan” is a debt incurred by the taxpayer solely to pay qualified higher education expenses—
(A)which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,
(B)which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and
(C)which are attributable to education furnished during a period during which the recipient was an eligible student.

The Internal Revenue Code goes on to define qualified higher education expenses as the cost of attendance at an eligible educational institution.

Finally, the Internal Revenue Code defines an “eligible educational institution” as an institution which is described in section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088), as in effect on the date of the enactment of this section, and which is eligible to participate in a program under title IV of such Act.

In other words, only the cost of attendance at an eligible educational institution are considered a qualified education loan that aren’t wiped out in bankruptcy.

The School Wasn’t An Eligible Educational Institution

The Federal School Code List contains the unique codes assigned by the Department of Education for schools participating in the Title IV federal student aid programs. Students can enter these codes on the Free Application for Federal Student Aid (FAFSA) to indicate which postsecondary schools they want to receive their financial application results.

The Federal School Code List is a searchable document in PDF and Excel format. The list will be updated on the first of February, May, August, and November of each calendar year.

You can find the list here.

Without sending you running off to check, Wings of the Cascades wasn’t on the list when Joel went there. Neither was Spirit Flight, Inc.

The school wasn’t an eligible educational institution.

And so Joel’s loan was wiped out in his bankruptcy case.

What Does That Mean For You?

If you owe money for private student loans, check the Federal School Code List for the years in which you went to the school.

If it’s not on the list, your private student loan may be discharged in bankruptcy.

It’s not magic – just the way the law works.

The court’s decision can be found here.

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About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.