Although most people think student loans can never be discharged, that is not always true. First, if the loan isn’t the type of student loan defined in the Bankruptcy Code, it is dischargeable the same as any other loan. Second, even if it is the defined type of student loan, it is still dischargeable if the person qualifies for a hardship discharge.
Three Types of Student Loan Debts
The Bankruptcy Code defines the type of student loan debts that may not be dischargeable. There are three types within the definition: (1) an overpayment of an educational benefit, scholarship or stipend; (2) a 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; and (3) any “qualified education loan”. The first two don’t need a lot of explanation but a “qualified education loan” does. That is defined in the tax code and means a debt incurred solely to pay certain higher education expenses of the person filing bankruptcy, their spouse or dependents, and includes debts incurred to refinance a qualified education loan. However, a loan from a relative or company controlled by a relative is excluded, meaning it is fully dischargeable. A simple way to determine if it’s a “qualified education loan” is to look at whether the interest on the loan is deductible for income taxes. If it is, it’s a “qualified education loan”. If not, it isn’t. Also, the actual use of the loan funds doesn’t matter. If the purpose of the loan was to finance education, the fact the funds were used for something else doesn’t matter. Any loan or debt that is not included in the definition described in this paragraph is dischargeable the same as any other loan.