Student Loans and Divorce: How Splitting Up Affects Your Debt
When I was 25, I went through a divorce. That meant we had to split up all our assets and debts. Dealing with student loans and divorce in particular is a bit more complicated and requires some additional knowledge beforehand.
Needless to say, going through a divorce can be a long and grueling process of untangling your commingled finances, especially when you have debt.
There are no simple answers when it comes to divorce. Student loans are one of many different factors that must be considered, so let’s start with the basics. Who is responsible for student loans in a divorce?
When going through a divorce, you must divide all your assets and debts in accordance with the laws of the state in which you live, unless you have a legally-binding prenuptial agreement (more on that below).
Anything you jointly own is considered marital property and will be divided according to whether you live in a community property or equitable distribution state.
In a community property, both spouses have equal ownership of all marital property and everything is split 50-50. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
In an equitable distribution state, the division of marital property is more complicated since each spouse has a legal claim to a fair and equitable portion of any assets, which may not mean a 50-50 split.
Most states are equitable distribution states, and the courts will have the final say.
At times, assets are divided among spouses differently than the debts are. Usually, however, they are divided using the same formula.
Student loan debt before marriage
If you and your spouse have an equal amount of student loan debt, divorce agreements are a little easier to work out. You each take responsibility for your own student loans and make the payments.
However, if one spouse has more student loan debt than the other, the couple and their legal counsel will have to come to an agreement for dividing up the debts and assets in an attempt to balance.
One of the most common misconceptions about dividing student loan debt is that all debt obtained before getting married becomes shared debt once you’re married. This is not always the case.
Legally, any student loan debt you incurred before getting married is considered separate property and remains so after the divorce (unless a prenup states otherwise). So if you borrowed $70,000 to attend law school before marrying your spouse, that debt is yours.
Student loan debt after marriage
The division of student loan debt becomes a bit trickier if the loans were obtained during the marriage.
In some cases, the spouse who has the student loan debt isn’t necessarily the one who’s the breadwinner or makes the loan payments. How this debt is divided, again, goes back to the state in which you live, as well as which spouse benefited from borrowing student loans.
If the student loan is solely in one spouse’s name and the lender didn’t take the other person’s credit into consideration when granting it — via cosigning or spousal loan consolidation — it’s possible the other spouse will be off the hook. Again, these factors are largely situational, so the outcome will vary by couple.
Dealing with student loans and divorce can be tricky. As you’re going through the process and must divide your student loan debt, here are three important questions to ask that will help determine a fair outcome.
1. What was the money used for?
In most cases, the funds from a student loan go toward paying tuition, school fees, books and other educational materials in the pursuit of a degree.
However, some of the money borrowed can inevitably go toward living expenses and other costs that benefit the entire family. This should be taken into consideration for purposes of repaying the debt and how each spouse benefited from the money.
2. What is the earning power of each spouse?
When calculating equitable distribution of assets and debt, take into account each spouse’s ability to support themselves and any dependents.
If one spouse has no significant income or earning potential on their own, the courts will be less likely to deem it fair for that spouse to incur part of the student loan debt responsibility.
3. Did the borrower earn a degree during the marriage?
If the student loan borrower earned a degree as a result of the debt, it needs to be determined whether that degree is considered separate or marital property, and this is determined by where you live.
In some states, such as New York, a professional degree earned during the marriage can be considered marital property due to the lifetime earning potential. Any debt incurred while obtaining what’s considered marital property is most always categorized as marital debt. This means the student loan debt divorce agreement would deem both spouses responsible for repayment.
You might think of prenups as a way for wealthier couples to determine how to divide their income upon a split. These contracts can also settle matters of student loans and divorce.
Review your prenuptial agreement, if you have one, ideally with the lawyer who helped you originally draw it up. It’s possible your prenup stipulated who would be responsible for education debt upon a breakup of the marriage. If so, it could override whether or not you live in a community property state. (If you haven’t gotten married yet, you might consider a prenuptial agreement to formalize responsibility.)
If divorce proceedings leave you and your ex wondering how to fairly divide education debt, one creative solution could be student loan refinancing. This process would allow you to consolidate federal and private loans, assign it to one borrower and ideally lower the new loan’s interest rate.
Keep in mind that you might not want to refinance federal loans because they’d be stripped of government-exclusive benefits like income-driven repayment (IDR).
In fact, if you and/or your soon-to-be-ex currently repay federal loans under an IDR plan, let your loan servicer know about the divorce. Your monthly payment could decrease if you had previously filed taxes jointly and are expected to have a lower income as a result of the split.
After a divorce, student loan debt is typically still the responsibility of the person who incurred it. However, there are exceptions depending on your personal situation and what the courts decide is fair and equitable division for both spouses.
Be sure to consider all the possibilities and consult with a student loan lawyer before a divorce so you know what to expect. Divorce is never an easy process, but you can make it a little less painful by being financially prepared.