The court's decision turned on the fact that the agreement to pay tuition did not constitute a loan agreement. The text of 11 U.S.C. 523(a)(8) makes certain kinds of student loans non-dischargeable in bankruptcy, including:
"(i) 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; or
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend.”
The court said that section (ii) did not apply because no funds were received by the parent. Section (i) also does not apply because the tuition agreement did not constitute either an "overpayment" or "loan." The court emphasized that the tuition agreement was structured so that the parent would be making payments of tuition each month prior to the month for which the child would attend school. In other words, the parent would always be paid ahead on the tuition. The court said such an agreement does not constitute a loan or extension of credit.
The decision is a good first step in Kansas away from the overly broad interpretation courts around the country have given to
11 U.S.C. 523(a)(8). However, the decision provided little analysis or clarification of what constitutes "funds received as an educational benefit" which is the language many courts have used to say that any student loan is non-dischargeable. The "educational benefit" language has been applied so expansively around the country that it effectively renders the rest of 11 U.S.C. 523(a)(8) superfluous which is contrary to the fundamental rules of statutory interpretation. Bankruptcy courts, in Kansas and elsewhere, need to provide a clear definition of "funds received as an educational benefit" that does not make the rest of 11 U.S.C. 523(a)(8) superfluous and unnecessary.
The original decision can be read here.