Who Is Responsible for a Student Loan in Case of Divorce?
When a married couple gets divorced or separated, who is responsible for repaying the student loans and parent loans? The answer depends on whether the loans were borrowed before or during the marriage, whether the couple lives in a community property state, whether there is a prenuptial agreement and whether the ex-spouse cosigned the loans.
Community Property States
Student loans and parent loans borrowed during a marriage are considered to be the joint responsibility of the spouses if they lived in a community property state. Student loans and parent loans borrowed before a marriage or after legal separation or divorce remain the separate responsibility of the borrower.
In the nine community property states – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin – any income earned during a marriage, except for gifts and inheritances, is owned jointly by the married couple, regardless of who earned it. Assets acquired with this income are the joint property of the married couple.
Similarly, any debts incurred during the marriage, including student loans and parent loans, are the joint responsibility of the married couple, even if the debts benefited only one of the spouses.
This is in contrast with separate property and separate debt which was acquired or borrowed before the marriage or after the divorce or separation. Separate property and separate debt remain separate unless an action is taken to transform it into community property, such as putting the spouse’s name on the deed.
These rules apply regardless of whether the couple got married in a community property state or moved there after the marriage.
Upon separation or divorce, there is a 50/50 split of community property. For example, when a married couple gets divorced, each is responsible for 100% of their own separate debt and 50% of the debt that was borrowed during the marriage.
For example, if a husband borrows a private student loan during the marriage and the couple lived in a community property state, the lender can seek repayment from the wife even if she did not cosign the loan and the couple subsequently got divorced.
If a student loan was made before the marriage, or the couple did not reside in a community property state, the loan is the sole responsibility of the borrower, unless the spouse cosigned the loan.
See also: Complete Guide to Parent Loans
A prenuptial agreement (prenup) is a contract that is signed by the couple before a marriage to specify how property and debt will be divided in the event of a divorce or legal separation.
For example, a prenuptial agreement can specify that student loans borrowed for a spouse’s education will remain that spouse’s separate debt, regardless of whether the debt is borrowed before or during the marriage.
Prenuptial agreements can override the requirements of state law, regardless of whether the state is a community property state or not. This can provide clarity concerning the dissolution of a marriage, regardless of where the couple may live.
If there is an informal agreement where one spouse will work while the other goes to school, and then they’ll switch off, it is best if this agreement is memorialized in the prenuptial agreement. Otherwise, it may not be binding after divorce or separation and might not affect the financial settlement.
A cosigner agrees to repay the cosigned loan. The agreement to repay the debt will survive divorce or legal separation, even if there is a prenuptial agreement to the contrary. A prenuptial agreement is an agreement between the spouses and is not necessarily binding on a third party, such as an education lender.
Suppose a girlfriend cosigns her boyfriend’s private student loans. They sign a prenuptial agreement that specifies that the boyfriend’s loans will be his sole responsibility after divorce. They get married and then divorced. The lender can seek repayment from the girlfriend despite the prenuptial agreement because she entered into an agreement with the lender to repay the debt.
Federal Direct Stafford Loans do not involve cosigners. Federal Direct PLUS Loans may involve an endorser, which is like a cosigner, if the borrower has an adverse credit history. (This is rare.) More than 90% of private student loans to undergraduate students and more than 75% of private student loans to graduate students require a creditworthy cosigner.
Joint Consolidation Loans
The Higher Education Amendments of 1992 included a provision that allowed married borrowers to combine their federal student loans into a joint consolidation loan, starting January 1, 1993. To obtain a joint consolidation loan, each spouse agreed “to be held jointly and severally liable for the repayment of a consolidation loan, without regard to the amounts of the respective loan obligations that are to be consolidated, and without regard to any subsequent change that may occur in such couple’s marital status” [20 USC 1078-3(a)(3)(C)].
Because of the problems that occurred after borrowers started getting divorced or separated, the Higher Education Reconciliation Act of 2005 repealed the ability of borrowers to obtain a joint consolidation loan, effective on July 1, 2006.
Unfortunately, the Congress did not provide a mechanism for splitting a joint consolidation loan upon divorce or legal separation. Thus, each spouse remains responsible for repaying the full joint consolidation loan even if they get divorced or separated.
There have been several attempts to address this problem, but none have been successful so far. Rep. David Price (D-NC-4) introduced the Joint Consolidation Loan Separation Act (115-HR 2949) in the U.S. House of Representatives and Sen. Mark Warner (D-VA) introduced identical legislation (115-S.1384) in the U.S. Senate on June 20, 2017. The same legislative language was subsequently included by Rep. Bobby Scott (D-VA-3) in the Aim Higher Act (115-HR 6543) on July 26, 2018 and by Sen. Jeff Merkley (D-OR) in the Affordable Loans for Any Student Act (115-S. 3584) on October 11, 2018. These bills would allow a joint consolidation loan to be divided in proportion to each spouse’s share of the debt before the joint consolidation. But, none of these bills have been reported out of committee.
How to Deal with Joint Student Loan Debt after Divorce or Separation
There are a few options for dealing with a joint student loan debt after the couple gets divorced or separated.
If a joint debt does not provide an option for splitting up the debt, there are a few workarounds:
- Pay off the debt in full as part of the financial settlement, if the couple has enough resources to do so.
- Refinance the debt into new loans, one in each spouse’s name. Unfortunately, most lenders will not make such loans because of the high risk of default.
Keep in mind refinancing federal student loans means a loss in many benefits – income-driven repayment plans, any federal forgiveness programs, generous deferment options, and more.
If the couple does not deal with the debt, it can become a weapon that one spouse uses against the other. One spouse can stop making payments on the debt, knowing that the other spouse will have no choice but to start making payments. Otherwise, both ex-spouses will have their credit ruined when they default on the debt, in a form of mutually assured destruction.