Help! What Do We Do About Student Loan Debt in Divorce?
Divorce is an emotional whirlwind. Even while you try to heal your inner wounds, you must also focus on how to divide your life from your spouse’s. Many couples focus on splitting assets, like the house, vehicles, and investment accounts as they begin preparing for divorce negotiations, but you’ll also have to figure out how to deal with debt. Over 40 million Americans carry some amount of federal student loan debt. If you or your spouse have student loan debt, how is that divided in a divorce? Could you be forced to take some of your spouse’s student loan debt in a divorce? The answer might be yes!
In this article, we’ll look at how student loan debt is divided during a divorce. We’ll discuss when student loan debt is and isn’t martial property, how judges play a role in determining who pays what debt, and whether it’s a good idea to pay off your student loans before your divorce.
Love and Debt
These days, a college degree is required for most well-paying jobs. Additionally, top professionals, like dentists, ophthalmologists, cardiologists, lawyers, architects, and others require a graduate degree or a doctorate. This education isn’t cheap. According to The Institute for College Access & Success, seven in ten college graduates take out loans to finance their degree, with the average amount of debt being $28,950 per borrower!
If you or your spouse got a graduate degree, the debt is likely to be even higher. In an article in U.S. News & World, Jason Delisle, director of the Federal Education Budget Project at New America, stated that the average graduate student owes $57,600 in debt!
That’s a serious amount of money. If you are forced to make payments on your spouse’s loan, that could seriously impact your financial life as you try to recover from your divorce. (The same could be true of your spouse if you hold the majority of the student loan debt.)
Is Student Loan Debt Marital Property or Not?
The most important factor in whether or not a spouse is responsible for their husband’s or wife’s student loan debt is whether that individual took out the loans before or after marriage. In many states, as soon as you are married, any new income or debt earned by either spouse becomes marital property, shared by the couple.
For example, if your spouse took out their loans before the marriage, that debt is entirely theirs in most states, and you will not be responsible for paying it off. (The debt would be considered “separate property.”) One exception is if you co-signed the loan. (Co-signers are often required for private loans.) If you are a co-signer, you may be on the hook if your spouse stops paying their loans.
Another exception could come from your pre-nuptial agreement. This legal document can set the rules for your property division. For example, it could say that student loan debt will be shared among both spouses even if the debt was taken on before marriage. Or, alternatively, it could say that student loan debt acquired during the marriage will be the sole responsibility of the spouse who took out the loan. This is just another reason why prenuptial agreements are such an important tool to a smother divorce.
But, what happens if you don’t have a prenup and your spouse went back to school during your marriage and took out loans during that time?
Understanding Marital Property and Student Loans
Whether you will be responsible for paying a portion of your spouse’s student loans that were taken out during your marriage will depend on the specific laws of your state regarding the division of marital property. Certain states, including many of those known as “community property states”, split all marital assets (including debt) right down the middle. In other states, a judge has some leeway in determining how assets and debts are divided.
For example, let’s say that your spouse went to school to get a master’s degree in engineering, which allowed them to obtain a much higher-paying job. Six years later, you decide to get a divorce. A judge may be more willing to ask you to help pay off the student loan because you benefitted from your spouse’s increased income.
On the flip side of the coin, if you worked while your spouse was in school in order to support the family, a judge may decide that you already made payments toward the debt by your efforts. Also, a judge can certainly take your income into consideration. If you earn little or no income, a judge may determine that you don’t have the means to assist your spouse in paying off their student loans, especially if he earns a much higher income than you.
Keep in mind that the same rules apply if the roles are reversed. If you are the one who took out student loans during your marriage, your spouse may be responsible for splitting that debt with you as part of your divorce settlement.
Negotiating Student Loan Debt
One important thing to keep in mind is that you always have the option of deciding how you want to divide student debt as part of your divorce settlement process as long as you and your spouse can agree on the terms. It’s not uncommon for both spouses to have student debt and to agree that each will take responsibility for their own student loans after a divorce.
If your spouse has the debt and you don’t want to take it on, you can offer other assets to “pay off” your share of the debt. For example, let’s say your spouse has $30,000 of student loan debt that was taken out during your marriage. This would likely be considered marital debt, so you would be responsible for $15,000 of the debt. Instead of starting your new, post-divorce life with $15,000 of debt, you can offer your spouse $15,000 from your share of equity in the house or the RV your spouse wants to keep.
On the other hand, if the student loan debt is yours, you may be able to negotiate to your advantage, asking for additional assets, so your spouse doesn’t have to carry any of the debt.
It’s always a good idea to consult a family law attorney to determine the best negotiating strategy and how to deal with marital debt during a divorce. You may also seek divorce mediation to work through your negotiations.
Should You Pay Off Student Loan Debt Before Divorce?
The answer to this question will depend in large part on your specific circumstances. If your spouse took out student loan debt before your marriage, you may not be responsible for any part of it after your divorce. Even if the student loan debt is marital property, you may be able to make a case to a judge on why your spouse should be responsible for more or all of the debt. In these cases, you may not want to pay off the debt, since it is likely most of it will go to your spouse.
On the other hand, if you took out the student loan debt during your marriage and believe you can make a good case for why it should be treated as marital property, you may be able to split the debt with your spouse as part of your divorce agreement. In this circumstance, it may be best not to pay off the debt, since a portion of it will be your spouse’s responsibility.
Do you think you’ll end up with some or all of the student loan debt after your divorce? There are some good reasons to try and pay it down before your divorce (if you feel comfortable waiting to file). Carrying student loan debt will impact your credit score and your ability to qualify for loans, like a car loan or mortgage loan. It will also represent a monthly bill you’ll need to pay on your own.
However, there is also one good reason you might want to hold off on paying off the loan while you’re still married. If you are currently on an income-driven repayment plan or able to switch to an income-driven repayment plan after divorce, your monthly payments will go down if you make less on your own than you did as a married couple. In other words, unless you were the sole breadwinner of your house, your monthly loan payments would be less.
Not sure whether or not to repay your student loans before your divorce? This is a great question to ask a financial advisor, or especially a certified divorce financial planner.
How to Lower Student Loan Payments After a Divorce
Divorce is often a major financial blow. After you split with your spouse, you will most likely have less income, savings, and investments. That will make it harder to pay off any student loan debt you came away from the divorce with.
If you’re working with a financial advisor, they can help you put together a post-divorce budget that takes your student loan payments into consideration. You can also take certain actions to help lower your monthly payments.
Income-Driven Repayment
If you are not currently in an income-driven repayment plan, see if you can switch to this repayment model. As the name suggests, this type of plan calibrates your monthly loan payments based on your discretionary income. Be aware that only certain federal loans qualify for income-driven repayment. Most private loans do not qualify. This plan will also increase the length of your loan. The good news is that you may qualify for loan forgiveness on any remaining balance after 20 to 25 years.
Loan Refinancing and Consolidation
If you have private student loans and cannot switch to an income-driven repayment plan, another option is to refinance your loan to obtain a lower interest rate and/or a longer repayment term. (By spreading out your loan repayment over a longer length of time, you’ll pay more overall in interest, but your monthly payments may be lower.) You’ll need to figure out what the interest rate on your loan is and then see if current interest rates are lower.
You can also choose to consolidate multiple student loans into a single loan as part of the refinancing process. The benefit is that you’ll have just one loan payment to make per month, which can simplify your budget. Also, refinancing your loan is a good way to take your spouse’s name off the loan if you took out the original loan together.
A financial adviser or loan broker can help you determine if refinancing and consolidation can save you money on your monthly loan payments.
Loan Forgiveness
Student debt relief is a hot political topic. It’s always a good idea to check whether you qualify for loan forgiveness through income-driven repayment or the Public Service Loan Forgiveness program. Keep an eye on the news, as more loan forgiveness options may be on the horizon.
Negotiating with Lenders
Finally, it never hurts to reach out directly to your lenders and see if there is any wiggle room to negotiate the payment terms of your loans. Your lender needs you to pay your loan, so they may be willing to extend the term of your loan or adjust your interest rate so that the payment is more manageable. Many lenders have leeway to change loan terms in the event of a negative life event, like a divorce.
Dealing with Student Loan Debt and Divorce
Splitting your assets during divorce is hard enough. No one wants to walk away from divorce with student loan debt, especially if your spouse was the one who took out the loans. However, divorce usually isn’t pretty and it’s almost never fair.
If you do have student loan debt in your marriage, understand your options. As we mentioned in this article, a financial adviser well-versed in divorce can be well worth their fee. A good divorce lawyer can also help you negotiate a fair settlement.
A great first step as you consider divorce is to attend a local Second Saturday Divorce workshop where you’ll be able to meet local divorce attorneys and other divorce professionals.
