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Private Student Loans and Bankruptcy

Most student loans are not dischargeable, whether they are federal student loans, which are those backed back the Department of Education and those private loans, which are not guaranteed by the Department of Education. Private loans can held found dischargeable under certain circumstances.

Private loans are dischargeable under 11 USC ยง523(a)(8)(B). Under the current wording of Section 523(a)(8)(B), a debtor must satisfy the undue hardship standard if the debt is "any other educational loan that is a qualified education loan, as defined in section 221(d) (1) of the IRS code of 1986 incurred by a debtor who is an individual."

According in section 221(d) (1) of the IRS code, a loan qualified for a tax deduction must be incurred solely to pay for "qualified higher education expenses." The definition of these expenses is a broad one.

Most private loans are not dischargeable because they qualify as an education loan and are tax deductible. However, be on the lookout for mixed use loans, which are loans for educational expenses and other non-educational expense, such as home improvement, lines of credit or any expenses not solely for educational expenses. In other words, look to how the proceeds were used.

In addition, another requirement for a qualified educational expense" under the IRS code is that the institution be eligible to participate in a Title IV program. Unaccredited schools are not eligible to participate in a Title IV programs.

Also, if student loans were paid off by an employer, the money owed to the employer as part of a hiring incentive is a dischargeable debt. In addition, a creditor must also establish that a loan was entered into; there must involve a transfer of funds and a formal agreement specifying the repayment terms. One must pay careful attention to the difference between a student loan and tuition. Tuition is a dischargeable debt.

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