Student bankruptcy is an ongoing problem for the multitude of student loan programs. To address this problem, Congress passed 11 U.S.C.Sec 523(a)(8) of the Bankrupcy Code. Sec. 523(a)(8) states:
(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 governmental unit, or made under any program funded in whole or part by a governmental unit or nonprofit institution, or for any obligation to repay funds received as an educational benefit, scholarship or stipend unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor’s dependents.
This section is significant in that it broadens the non-dischargeability of student indebtedness to include “an obligation to repay funds received as an educational benefit, scholarship or stipend”. In the Matter of Burks, Debtor, Burks, Plaintiff-Appelant v. Louisiana State of & Board of Regents, Defendant-Appellee, 244 F.2d. 1245(11th Cir. 2001) the Court ruled that an educational stipend received by a debtor was a non-dischargeable debt when the debtor failed to perform certain conditions to which he had agreed in return for his receipt of the stipend.
In was undisputed that Burks received three graduate fellowship stipends through the Louisiana Board of Regents “Graduate Fellowship Program” from 1983-1985 totaling $30,000.00. Their were certain conditions attached to the receipt of the stipend including that the recipient be available to teach for 3 years at a public institution of higher education at which the recipient would be an other-race faculty member.
Burk, after obtaining his graduate degree, did not fulfill his obligations under the agreement and did not repay the stipends with interest. In 1999, Burks filed for bankruptcy requesting the Bankruptcy Court to discharge, among other debts, his stipend with interest which had risen to $98,167.42. Burks lost and appealed to the U.S. District Court for the Northern District of Alabama.
Burks argued that the purpose of the stipend was not solely related to his educational goals and therefore it was not an educational benefit as contemplated by the Bankruptcy Code. The Court upheld the earlier ruling. The Court reasoned that it was clear from the agreements between Burks and the Board that Burks had agreed to certain conditions in return for the stipend. He also agreed to repay the stipend with interest if he failed to meet those conditions. Since Burks was not seeking discharge due to undue hardship(which he did not assert in any of his pleadings), the Court ruled that the stipend was an educational benefit and therefore was not dischargeable pursuant to the Bankruptcy Code.
This case is significant as it addresses the issue of an educational benefit as a non-dischargeable loan from the college to the student. This may give guidance to the financial aid practitioner as it relates to extensions of credit to the student by the financial aid office either in the extension of credit while awaiting a financial aid determination or in an extension of credit by the college to the student for books or other educationally related expenses. It allows that an institution may challenge the discharge of the debt in bankruptcy if the student sought the credit but did not meet the conditions agreed to in return for the credit.