By: Sean B. King
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff
In Homaidan v. Sallie Mae, the United States Court of Appeals for the Second Circuit held that private educational loans may be discharged under § 523(a)(8)(ii) of title 11 of the United States Code (the “Bankruptcy Code”).[1] Homaidan funded his college education, in part, with two private tuition loans from Navient that totaled $12,567.[2] Soon after graduating from college, he filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code with the United States Bankruptcy Court for the Eastern District of New York.[3] Ultimately, he received a discharge, but it was unclear that the loans from Navient were discharged. In response to Navient’s efforts to collect repayment, Homaidan filed a complaint against Navient with the bankruptcy court, arguing that Navient “employed a scheme of issuing dischargeable loans to unsophisticated student borrowers and then demand[ed] repayment even after those loans [were] discharged in bankruptcy.”[4] Navient moved to dismiss the complaint, arguing that the educational loan it provided to Homaidan constituted an “educational benefit” under § 523(a)(8)(A)(ii), which generally requires a showing of undue hardship before a student loan is discharged.[5] The bankruptcy court rejected that argument and held not “all education related debt” need to satisfy the undue hardship requirement.[6] The district court thereafter certified the bankruptcy court’s order for direct appeal to the Second Circuit for review.[7]
On appeal, the Second Circuit reviewed de novo whether the education loans Navient provided Homaidan were dischargeable without showing undue hardship, and held that they were.[8] According to the Second Circuit, Navient’s loan was an “obligation to repay funds received as an educational benefit” under § 523(a)(8)(A)(ii).[9] The text and structure of § 523(a)(8) is narrower than what Navient had argued.[10] According to the Second Circuit, it is not appropriate to read “loan” into § 523(a)(8)(A)(ii).[11] The drafters created three distinct sections in § 523(a)(8) that mention specific categories of debt.[12] Using the canon of surplusage, the court held that a reading of § 523(a)(8)(A)(ii) that incorporates “any loan” as being dischargeable is a violation of the canon.[13] Such a reading would render other subsections meaningless.[14] Using the canon of noscitur a sociis, the court looked to the companion words “scholarship” and “stipend” to help determine how we should read “educational benefit.”[15] After considering the meaning of both companion words, the court found that an “educational benefit” is a conditional payment.[16] “Educational benefits” are more akin to tuition exchange programs than to the type of educational loan that Navient provided.[17]
In general, student loans are not dischargeable unless there is undue hardship.[18] This requirement does not apply to all student loan debt. According to the Second Circuit, it would apply to private debts that fall into one of the categories laid out in § 523(a)(8).[19] Private loans, however, are not one of the applicable debts for § 523(a)(8)(ii) and therefore not subject to the undue hardship requirement.[20]
[1] 3 F.4th 595, 605 (2d. Cir. 2021).
[2] Id.
[3] Id.
[4] Id.
[5] Id.
[6] Id. (quoting In re Homaidan, 596 B.R 86).
[7] Id. (citing Homaiden v Sallie Mae, No. 19-CV-935, 2020 WL 5668972 at *3 (EDNY February 25, 2020). Finding the Bankruptcy Abuse Prevention and Consumer Act includes a mechanism for “leapfrogging the district court in the appeals process.” Weber v. U.S., 484 F.3d 154, 160 (2d. Circuit 2007). Because there is no controlling case in the Second Circuit on that issue, the Second circuit is the appropriate forum for consideration of this issue).
[8] Homaiden, 3 F.4th at 601, 604.
[9] Id. at 601. The court mentions that “Navient does not argue that the loan . . . falls into either the first or third categories. Nor does Navient argue the loan constitutes a ‘scholarship’ or ‘stipend.’” Because Navient does not make these arguments, the only question left is whether it is an “obligation to repay funds received as an educational benefit.”
[10] Id. at 599.
[11] Id. at 601. The court quotes the tenth circuit in finding that “no normal speaker of English . . . would say that student loans are obligations to repay funds received as an educational benefit.” Next, the court looks to the fact that the word “loans” was used in the surrounding sections and that it was intentionally not included here. Id. (quoting Russello v. United States, 464 U.S. 16, 23 (1983)).
[12] Id. at 602–03.
[13] Id.
[14] Id. The Canon of Surplusage “advises courts to interpret a statute to effectuate all its provisions, ‘so that no part will be inoperative or superfluous.’” (quoting Hibbs v. Winn, 542 U.S. 88, 101 (2004)). If the court were to read § 523(a)(8)(A)(ii) as applying to “any loan,” subsections § 523(a)(8)(A)(i) and § 523(a)(8)(B) that mention “specific categories of nondischargeable educational debt” would be inoperative.
[15] Id. at 604. Canon of noscitur a sociis “counsels that a word is given more precise content by the neighboring words with which it is associated.” (quoting Freeman v. Quicken Loans Inc., 566 U.S. 624, 634-35 (2012)). Here, the words “scholarship” and “stipend” are companions to “educational benefit.” The court looks to the meanings of those words to try and understand “educational benefit.”
[16] Id. (finding “educational benefit . . . is best read to refer to conditional grant payments similar to scholarships.”).
[17] See id. The court used the example of the Reserve Officer Training Corps and the National Health Services Corps that each pay tuition in exchange for a certain commitment. If that commitment is broken, the student must repay the funds.
[18] Id. at 600.
[19] Id.
[20] Id.