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Watch out for unpaid balances

Debtors (and their lawyers) often confuse unpaid tuition balances with a student loan.  This is important because only student loans and defaulted grants are non-dischargeable.  Unpaid tuition balances owed directly to a school are dischargeable.  Oddly enough, this question has been litigated ad nauseum, and there is an abundance of case law explaining the difference.

What exactly is the difference though?  Generally, in order for there to a be loan, courts have looked to the common law and found:

To constitute a loan there must be (i) a contract, whereby (ii) one party transfers a defined quantity of money, goods, or services, to another, and (iii) the other party agrees to pay for the sum or items transferred at a later date.[1]

Lovers of contract law will recall that in order for there to be a binding contact, there must be an offer, acceptance, AND consideration.

Schools are well aware of this distinction, and should be upfront with the student beforehand whether the debt is an unpaid balance, or a loan.  However, some of the less scrupulous institutions have even found a way to hedge their bets and call it a loan or an unpaid balance depending on who is asking.  Here’s how they do it.

In order to prove that they supplied consideration, some schools include a disclaimer on the unpaid invoice that says something like  “in exchange for promising to pay this money at a later date, the school will allow me to continue attending classes without paying the full tuition upfront.”  But notice that by including this language, the school has supplied consideration, and committed itself to classifying the debt as a loan.  But then why don’t they just come out and say it?  Because then they’d be required to comply with the Truth in Lending Act.

If your client shows you what looks like a promissory note that has language suggesting consideration, that may be a loan.  If it is, then the school needed to comply with the requirements of the Truth in Lending Act (“TILA”).  If they didn’t, then they are liable for statutory damages, and attorneys’ fees under TILA.

When negotiating with opposing counsel over an unpaid balance, ask them to supply the Truth In Lending Statement.  If they can’t, you can be sure they’ll drop any argument about the unpaid balance being a loan.


[1] In re Renshaw, 222 F.3d 82, 88 (2d Cir. 2000)