When we think about student loans, we normally automatically think about loans taken out for college or other higher education. In the Bankruptcy context, we also know that public and private student loans are generally nondischargeable unless the borrower meets the tough “undue hardship test.” However, the fact is that Bankruptcy law does not limit nondischargeable loans to higher education. The specific code section (§523(a)(8)) actually refers to “an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, and “an obligation to repay funds received as an educational benefit, scholarship, or stipend.” There is no limitation that the educational loan or benefit is limited to higher education.
A recent case in Georgia highlights this issue. In the case, parents of three minor children in a private day school entered into a standard contract to pay the tuition and fees for each child ($42,270!). Due to their financial issues, the parents later entered into another contract to pay the tuition and fees over time. After the parents filed a Bankruptcy case, the Court found that the debt to the school was a nondischargeable educational loan. The second contract was a valid contract in which the parents agreed to pay, over time, for the educational services provided by the day school. Because the law did not limit the nondischargeable debt to higher education (and, in fact, Congress removed that limitation in 1984), the debt to the school was nondischargeable. To read about this case in more detail, click here.