Connecting through community

Best Case Home » Community Articles » Student Loans » Private student loans with non-profit guarantees
Private student loans with non-profit guarantees

As if section 523(a)(8) was not confusing enough, there is another issue associated with discharging non-qualified education loans that you’ll need to be on the watch for.  This issue concerns non-qualified education that has no protection from discharge under section 523(a)(8)(B), but which the creditor will argue is nonetheless non-dischargeable as a non-profit loan under section 523(a)(8)(A)(i).

Very often this problem will arise when litigating against the National Collegiate Trust (“NCT”).  NCT partnered with an organization called The Education Resources Institute (“TERI”) until 2008 (the year TERI went bankrupt) to issue guarantees on certain private student loans.  NCT, therefore, argues that all of their private education loans, whether qualified or non-qualified, are exempt from discharge as non-profit loans.

The question of whether a non-profit guarantee is sufficient to render a debt dischargeable is a question the courts are a bit conflicted on.  The language of section 523(a)(8)(A)(i) excepts from discharge

“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.”

Now, you’ll note that this subsection essentially renders two types of educational debts non-dischargeable:

(i) any loan touched in any way by a governmental unit (generally the federal government, but also any state actor);
(ii) an educational loan “made under any program funded in whole or part by a governmental unit or nonprofit institution.”

Many litigators have sought to parse the language of section 523(a)(8)(A)(i) in the following way.  Note that the language of section 523(a)(8)(A)(i) says that it is sufficient for a governmental unit to guarantee an educational loan to render it non-dischargeable—but it does not say it is sufficient for a nonprofit to merely guarantee a loan.  Clearly, so the argument goes, Congress did not intend a mere nonprofit guaranteed to be sufficient. Instead, the loan must have been made under a program funded in whole or part by a nonprofit.  This argument rests upon the commonly accepted canon of statutory analysis stating

“where Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.”[1]

This argument seems like sound statutory analysis. However, some courts, including the Second Circuit, have refused this interpretation and found that any debt that is guaranteed by a nonprofit qualifies under this subsection for exclusion from discharge.[2]  (Damn you people—whatever happened to exceptions to discharge being construed narrowly against the creditor?!).

So while it is surely worth making this argument if you do not live under the Second Circuit rule (no other circuits have adopted this interpretation), the better argument is going to be making the creditor prove the existence of the guarantee.  Do not let them rely on boilerplate language in the promissory note that the loan was made under a program funded by TERI. This is not sufficient, and you must demand to see the actual paperwork and evidence concerning the existence of the guarantee.  Very often these guarantees are conditional and did not apply to your client’s loan and thus the creditor cannot rely on them to meet their burden. As the bankruptcy court in Oregon stated when presented with this problem recently:

NCSLT alleges that repayment of the Debt was guaranteed by The Education Resources Institute, Inc. (“TERI”), which is apparently a now-defunct non-profit loan guaranty agency. But a close reading of the Motion reveals a tenuous basis for this claim. The only evidence that NCSLT offers concerning the existence of a guaranty is that the Loan Documents signed by Debtor contain a statement reading

“I understand that you have purchased a guaranty of this loan and that this loan is guaranteed by [TERI].”

NCSLT has not shown how Debtor would be competent to testify to such a fact. Because there is no suggestion in the record that Debtor ever had personal knowledge of the existence or terms of a third-party guaranty, the boilerplate language of the Loan Documents cannot prove the actual existence of a guaranty. Aside from the language of the contract, NCSLT has introduced no evidence showing that the loan was made or guaranteed by a nonprofit or governmental agency—accordingly, NCSLT has not shown that the Debt is nondischargeable under § 523(a)(8)(A)(i). [3]

[1] Rodriguez v. U.S., 107 S.Ct. 1391, 1393, 480 U.S. 522, 525 (1987).

[2] In re O’Brien, 419 F.3d 104, 106 (2nd Cir. 2005) (“O’Brien’s core argument is that TERI merely guaranteed, rather than funded, O’Brien’s loan, and that as such O’Brien’s debt on the loan is dischargeable. O’Brien highlights the fact that the first clause of § 523(a)(8)-a clause that both parties agree is inapplicable to the current case-covers loans “made, insured or guaranteed by a governmental unit.” O’Brien contrasts that language with the terms of the second clause of the section, pointing out that where the first clause uses the term “guaranteed,” the second uses only the term “funded.” On this basis, O’Brien concludes “that Congress excluded the term ‘guaranteed’ from the second clause of § 523(a)(8) for a reason. [W]here the legislature has carefully employed a term in one place and excluded it in another, it should not be implied where excluded.” O’Brien’s argument has an initial appeal to it but cannot carry the day.”).

[3] In re Clouser, 2016 WL 5864493, at *3 (Bkrtcy.D.Or., 2016).