Bankruptcy & Student Loans

Section 525(c), added by the Bankruptcy Reform Act of 1994, clarifies the law with respect to discrimination against applicants for student loans or grants. Prior to its enactment, some courts, such as the Court of Appeals for the Second Circuit in In re Goldrich  had held that section 525(a) did not extend to discrimination in student loan programs, since such programs did not involve a “license, permit, charter, franchise, or other similar grant.” These courts ignored the fact that these programs, though structured as loans, are in fact designed to confer grants upon student beneficiaries through subsidized interest rates and government guarantees. Typically, they have no credit requirements, since the applicants are usually young persons with no credit history.

Section 525(c) reinforces and makes explicit Congressional intent that a prior bankruptcy or nonpayment of a debt that is dischargeable in a debtor’s bankruptcy case may not be a basis for denial of a student loan or grant. The legislative history states that the Goldrich decision is overruled and that it “gave an unduly narrow interpretation to Code section 525.” Section 525(c)(2) defines “student loan program” broadly.

In light of the subsection’s broad provisions, as well as its legislative history, there should be no doubt that discrimination with respect to all student loan programs based upon prior bankruptcy cases or nonpayment of dischargeable debts is unlawful, regardless of when the applicant’s bankruptcy case was filed. The reference in section 525(c) to cases filed under the Bankruptcy Act, as well as to those filed under the Code, strongly bolsters the argument that Congress intended the amendment.

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