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Creditors know that not all student loans are non-dischargeable

Recall that “real student loans (i.e., qualified education loans)” are loans that are made solely for qualified higher education expenses.  Where the loan is not used solely for qualified higher education expenses, that debt is not a “real student loan” and is dischargeable in bankruptcy.

It is worth noting that the banks are perfectly aware of this distinction.  In fact, since at least 2006, private student lenders have been securitizing these debts into asset-backed securities and have been warning their investors that some of their debt instruments contained in these trusts may be dischargeable in bankruptcy.   Although these disclosures are not dispositive, they can be used as important evidence to show the courts that the creditors arguments are completely contradicted by their own public disclosures to the SEC and the investment banking world:

Risk of Bankruptcy Discharge of Private Credit Student Loans: Private credit student loans made for qualified education expenses are generally not dischargeable by a borrower in bankruptcy . . . direct-to-consumer loans are disbursed directly to the borrowers based upon certifications and warranties contained in their promissory notes, including their certification of the cost of attendance for their education. This process does not involve school certification as an additional control and, therefore, may be subject to some additional risk that the loans are not used for qualified education expenses. If you own any notes, you will bear any risk of loss resulting from the discharge of any borrower of a private credit student loan to the extent the amount of the default is not covered by the trust’s credit enhancement.[1]

What Sallie Mae is saying here is that despite the warranties and certifications made in the promissory notes, some of the loans may have been made for expenses other than qualified higher education expenses.  Where that happened, the debt may be discharged in bankruptcy.

Sallie Mae has also warned its investors that all “Career Training” loans are dischargeable in bankruptcy.  Career Training loans are the lending program Sallie Mae uses to make loans to trade schools, vocational schools, and high schools, most of which are not accredited by the Department of Education:

Risk Of Bankruptcy Discharge Of Career Training Loans: Career training loans are generally dischargeable by a borrower in bankruptcy. If you own any notes, you will bear any risk of loss resulting from the discharge of any borrower of a career training loan to the extent the amount of the default is not covered by the trust’s credit enhancement.[2]

Be sure to show the court these disclosures, which can be very useful in demonstrating how disingenuous the creditors’ arguments for non-dischargeability are.


[1] See SLM Loan Trust 2008-1 Prospectus Supplement, dated January 10, 2008.

[2] See Navient Private Education Loan Trust 2014-CT, Offering Memorandum, available at https://www.navient.com/assets/NAVSL%202014-CT%20-%20Offering%20Memorandum%20-%20As%20Printed.pdf