According to recent data, nearly two-thirds of college graduates will marry. Similarly, roughly 70% of those attending college will incur student debt. The question is: What happens with you and your former spouse’s student loan debt after a divorce?
Divorce laws vary from state to state, and the courts look at many issues when determining how to fairly divide marital assets and debt, which may include student loans from either spouse. To be on the safe side, you may want to consult an attorney who specializes in divorce and a qualified tax professional to determine your exact situation. However, there are a few guidelines to consider, such as:
- Whose name is on the loan?
- Did you obtain the loan before or after you got married?
- Did you use the money solely for educational purposes?
Whose Name Is on the Loan?
When you applied for and were granted a student loan, whose name was put on the document? That’s an important point since whoever signed the loan – or their co-signer – is the party responsible for paying off the debt.
Were You Single or Married When Loan Documents Were Signed?
As a general rule, if you bring assets and/or debt into a marriage, you will leave with the same, unless your former spouse agrees to assume all or part of your student loan debt. Either way, all assets and debts will be addressed in your final divorce documents.
However, if you were married at the time you signed and received your student loans, or if your former spouse co-signed any of the documents, then you would both be legally liable for repayment – unless reversed by a court.
Spousal Consolidation Loans
In the late 1990s and early 2000s, spousal consolidation loans were available. This gave couples the opportunity to combine personal debts brought into marriage into a new, larger loan. While it seemed like a good idea at the time, it created havoc when one spouse refused to contribute to the debt repayment, leaving the other spouse responsible. Due to the backlash, Congress banned these types of loans in 2006.
Although the statue banned married couples from receiving a new federal consolidated loan, some private lenders are willing to consider loan consolidation that could include a prior federal student loan.
Where Do You Live?
Divorce rules vary greatly from state to state. Generally, they fall into one of two camps.
The two types are:
- Community property states. They include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
- Equitable distribution states. All other states follow this model.
In a community property state, assets and debts accrued while married belong to both parties. For example, if you jointly purchase a major asset, such as a car or home, it’s marital property, making you and your spouse equally responsible for the loan. The same goes for student loans. If you secured the loan while married, you may be responsible for half the amount to pay back.
However, there is no “one-size-fits-all” when it comes to dividing assets and liabilities in a divorce proceeding. In California, for example, both federal student loans and private student loans are exempt from community property rules. So, if you took on federal loans in that state, the rules may not apply. This is where expert counsel is needed.
Equitable distribution states represent the Wild West of divorce rules. The court or an expert you designate determines what’s yours and what belongs to your partner. Many variables could play a role in separate property determinations.
Experts say the court can determine how long a spouse may have benefited from a professional degree. For example, if your spouse incurred student loan debt during the marriage and, in return, you benefitted from a six-figure salary for a decade, the court could decide that you’re responsible for part of the bill after the divorce. The courts could also factor in:
- Earning potential. Can you reasonably pay back your half of the loan?
- Degree status. Did a partner earn a professional degree that helped the household?
- Length of the marriage. How long were you married? In many cases, the court will place more weight on longer marriages than shorter ones. How much did you pay toward the debt during that time?
When Did You Get the Loan?
As mentioned, when you obtain the loan is important.
If you signed the loan:
- Before you were married, the debt is probably yours. There are few exceptions to this rule, no matter where you live. Your name is on the loan document, and you took on this responsibility before you agreed to love, honor, and cherish someone else. It’s only fair that it stays with you as a separate debt.
- During your marriage, it’s a little more complicated. Some types of loans will always stay with you, including federal versions. But if you took out a loan with a spouse as a co-signer, or the two of you combined debt into one loan, you’ll probably have to pay that back together.
What Did You Use the Student Loan for?
In a perfect world, you’ll use your student loan to cover tuition, fees, and supplies. But it’s not uncommon for students to dip into funds to cover living expenses like rent, food, and utilities.
The National Association of Student Financial Aid Administrators says less than a third of undergraduates borrow more money than they need to cover tuition and fees. Those students probably use the excess for something else.
If you take out a bigger loan to keep a roof over your head and food in your family’s mouths, your spouse benefitted. In a way, you were working as the breadwinner for the household. If that debt lingers, your spouse is likely liable for some of it.
But if you only used your loan to pay tuition, and you never shared a cent of it with the household at large, the debt will likely be yours alone.
How Will This Hurt Your Future Finances?
Most financial or legal decisions you make can impact your credit score. There are many variables to consider, but in some situations, being released from debt may harm or improve your credit score.
Consider a few scenarios:
- You incurred debt while you were legally married, but you only keep a third. If your income remains high, you suddenly have an improved credit score. And, you have a lower debt-to-income ratio.
- You had no debt before the marriage, but now you owe half of a loan. If your spouse incurred debt during the marriage and you’re found to be responsible for half of the loan after divorce, your credit will likely take a hit.
Student loan divorce decisions can also hit you hard at tax time. If you have a student loan, you can take multiple tax deductions, including student loan interest deductions, which can reduce your taxable income by up to $2,500 per year, experts say.
If you walk out of the divorce without student loan debt, you can kiss those deductions (and others like it) goodbye. This will likely kick up the amount you owe at tax time.
What Can You Do in Advance?
It’s never fun to consider the implications of a divorce when you’re planning a wedding. But if you keep an eye on your financial health before you tie the knot, you improve your chances of ensuring your financial future remains on solid ground.
Many experts suggest that a prenuptial agreement can help protect you and your future spouse, especially if one or both bring substantial assets or debt into the marriage. If a prenuptial agreement is used, the document should specify what happens to any student loan balance incurred by you or your future spouse, as well as any future loans you acquire jointly.
What Can You Do if Divorce Is Imminent?
Regardless of your circumstances, you can still make wise financial decisions.
In most every divorce case, you’ll need a lawyer to advocate on your behalf. A family law attorney can access your particular situation and make recommendations designed to protect your interests moving forward. Even if you feel you are separating from your spouse on good terms, it’s always best to have your own attorney.
Arbitrators and mediators are other options. They are trained and certified professionals that work outside the court system to help couples reach an equitable understanding of debts and assets and how they should be divided.
Most importantly, make sure that all the decisions you make are transmitted to the owners of your debt. If you’re released from any financial responsibility, make sure your name is legally removed from the loan.
It’s Never Too Late to Secure Your Financial Future
Divorce is rarely easy. However, taking the proper measures to return to or stay on solid financial footing is a wise move. Nobody likes to think about a future without their soon-to-be spouse, but bearing the uncomfortable and getting a prenuptial agreement can save you from various financial woes down the road.
If you’re not sure where to start, and you’re not quite ready to seek the advice of counsel, CollegeFinance can provide you with the latest information to help you make the best decision for you and your spouse.