Who Is Responsible For Student Loans When There Is A Divorce?
If you’re planning to take on a student loan, there are some stipulations that you must bear in mind, especially in the context of a looming divorce. Borrowing student loans before and after marriage are two completely different stories and the implication of having student debt during a divorce requires careful consideration.
Let’s dive in.
Cosigning A Loan
If you take on a student loan before getting married, the loan is yours, and its conditions won’t impact your spouse. On the other hand, if one happens to be married at the time they decide to borrow a student loan, their spouse can cosign it, especially if the borrower is running short on financial credit.
However, keep in mind that co-signing your spouse’s loan is synonymous with promising loan repayment in case the borrower is unable to repay it on time. The terms and conditions of loan repayment apply both to the borrower and to the one who cosigns. In case of a divorce, you’ll still be subjected to these terms and may legally be held responsible until repayment is complete.
These are a minority of states that recognize common-law marriages. Common-law marriage is a legally recognized marriage that doesn’t involve the purchase of a marriage license or involve a marriage ceremony. It’s important to note that common-law marriages do require an official divorce ruling in case the couple wishes to go their separate ways.
Moreover, if you move from a common law state to a state that doesn’t recognize these marriages, you’re still subjected to the terms of the marriage of the current state you’re in. Therefore, your loan repayment responsibility will vary according to the divorce laws of the state you relocated to.
What this means for you is ample research and consideration before cosigning student loans on behalf of your spouse, especially if the loan is in the six-figure area.
Community Property States
Now divorce can be a grueling business, but certain states have tried to cater to the incumbent complications by passing laws on asset distribution following a divorce. These are called community property states. If you happen to live in one of these states or moved here after your marriage, your divorce arrangement will involve splitting all assets earned during the marriage equally between you and your former spouse.
In a community property state, all income earned is the joint asset of both the spouses. Similarly, any debt or loan incurred during the marriage also becomes the joint responsibility of both the spouses, regardless of whether the couple is still married or divorced. Since a divorce leads to a 50/50 distribution of community assets, you’ll still be held responsible for 50% of the loan incurred by your former spouse.
Income-Driven Repayment Plan
An income-driven repayment plan is a monthly student loan repayment plan where the amount repaid is based on your monthly income and size of your family. This type of plan makes sense in most cases since it makes repayment highly convenient. Nevertheless, there is a downside to it.
With these plans, the Department of Education generally makes use of the adjusted gross income from your tax returns. Since it’s common for couples to file joint taxes, scrutiny of your adjusted gross income from the year preceding the divorce could lead to unnecessary inflation in your repayment amount, unless you opt for some alternative income documentation.
In case there is a significant divergence between your and your spouse’s salaries, the smartest and safest move would be to switch to a smaller repayment plan, negotiating all repayment options with your loan service provider or filing for deferment.
Prenuptial Or Postnuptial Agreement
These are agreements that typically protect your private assets from unfair distribution resulting from a claim during a divorce. The difference between a prenuptial and a postnuptial agreement is that the former is created before the event of a marriage and the latter is created after a divorce.
Pre and postnuptial agreements can be a good resolution plan over assets and debt distribution in the context of student loans. Entering into one of these agreements will allow you to exclude any property privately owned from becoming consolidated marital property. This also applies to the loans you and your ex incurred during the marriage.
Student loans are an excruciating but often indispensable component of your financial plan. Combine this with a downhill marriage and you get a recipe for disaster. It is therefore imperative for students to know what happens to this loan in case of a divorce, and the ways to prevent the repercussions.