I understand government-backed student loans are not dischargeable in a bankruptcy. Does that change if refinanced via a private lender?
It looks like, generally, refinanced student loans are still subject to the general rule of nondischargeability, although there are some edge cases.
11 USC § 523(a)(8) contains the general rule that a discharge from bankruptcy does not discharge an individual from certain forms of educational obligation, subject to the undue hardship test. The interesting part is that this statute actually applies to three different forms of obligation:
- "an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution";
- "an obligation to repay funds received as an educational benefit, scholarship, or stipend"; or
- "any other educational loan that is a qualified education loan" as defined in 26 USC § 221(d)(1).
The first thing to note is that only the first of the three obligations requires any government involvement, and that branch also applies to loans made or insured by a nonprofit institution, not just the government. By itself, it doesn't look like branch (1) would be broad enough to cover a private loan used to refinance a government-backed student loan.
However, branch (3) is much broader and includes (generally speaking) any loan taken out to pay "qualified higher education expenses" (which means the cost of attending an "eligible education institution" minus some things), subject to some technical conditions, and also explicitly includes a loan taken out to refinance such debt.
So if the student debt was a "qualified education loan", then refinancing it has no effect on its special status relative to bankruptcy law. However, if the sole basis for the nondischargeability was one of the other two branches, then the refinancing may render it dischargeable in bankruptcy. This could happen, for instance, if a nonprofit institution made a loan to study at a foreign university which does not constitute an "eligible educational institution" within the meaning of 26 USC § 25A(f)(2) (*). In that case, the original loan would be nondischargable under branch (1) discussed above, but after being refinanced, the new loan may be dischargeable. However, for the vast majority of student loans, refinancing will have no effect on discharge in bankruptcy.
There are many conditions and exceptions contained in the statute and this post is not intended as a comprehensive discussion of this topic, does not constitute any form of advice, and should not be relied on for any purpose.
((*) To be clear, some but not all foreign universities constitute "eligible educational institutions".)