Bankruptcy and Outstanding Tuition Balances

In Boston University (the College) v. Rajesh Mehta (the student), Docket No. 01-2586, the College appealed a United States Bankruptcy Court finding that a student’s outstanding tuition balance owed to the College is not a loan and is dischargeable in bankruptcy. The College argued, to the contrary, that the outstanding balance of the student’s tuition and fees was a loan which could not be discharged since it was an ‘educational benefit’ or an “obligation for funds received as an educational benefit under 11 U.S.C. 523(a)(8), and therefore was not dischargeable in bankruptcy.

The Student attended the College from the Fall 1992 Semester through the end of the Fall 1993 Semester. The Student did not receive financial assistance for the Fall 1993 semester and did not pay his tuition bill. Nevertheless, the College registered the student and allowed him to continue to take classes. The student completed the semester and earned academic credit for three classes. Pursuant to Chapter 7 of the Bankruptcy Code, the student filed for voluntary bankruptcy. He listed the College as a general unsecured creditor, as he had failed to satisfy his financial obligation to the College.

The College contends that its willingness to allow the Student to enroll prior to him paying tuition constituted a loan to the Student. The College reasoned that since his tuition debt arose from an extension of credit for educational services, that the extension of credit was tantamount to an educational ‘loan’. The College argued it is well settled that an educational loan is not dischargeable in bankruptcy.

The College also argued that even if its extension of credit to the student was not a loan, the student’s delinquency is still not dischargeable because it represents an educational benefit under 523(a)(8). 11 U.S.C. 523(a)(8) reads:

(a) a discharge under section 727, 1141,1228(a), 1228(b) or 1328(b) of this title
does not discharge an individual debtor from any debt -(8) for an educational benefit overpayment or loan made, insured or guaranteed by a government unit, or made under any programfunded in whole or in part by a governmental unit or non-profit institution, or for an obligation to rep ay funds received as an educational benefit, scholarship or stipend, unless excepting such debt from discharge under this paragraph will impose undue hardship on the debtor and the debtor’s dependents.

The Student argued that his obligation to the College was dischargeable and that the College, for the purposes of bankruptcy, was simply an unsecured creditor.

The Court ultimately agreed with the Student. It looked to the common law definition of ‘loan’ to interpret the meaning of 523(a)(8). The Court reasoned that under the Common Law, ‘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.’ The court concluded since the College never made any inquiry into the Student’s credit worthiness and never required the Student to execute any kind of promissory note or loan agreement, that the College did not intend to loan the student the amount of the tuition for the Fall 1993 semester.

The Court added that, unlike a program such as a federally funded loan program whereby the student can not escape repayment by filing for bankruptcy, in this matter no funds were ever advanced by the College or received by the student for the semester in question. Therefore, the obligation remained an unsecured debt owed to the College.
Accordingly, the U.S. Court of Appeals affirmed the earlier judgment.