At a Glance
Divorce is an experience that few people expect to go through when they say those magical words of commitment to one another at their wedding. Allocating divorce debt certainly isn’t a conversation to promote marital bliss, so few couples talk about it until the end is near. That’s when the questions about assets and debts start to come up.
Student loans and divorce present their own set of complications. Barring the existence of a prenuptial agreement that specifically covers it, student loan debt isn’t treated any differently than other types of debt. If the debt was incurred prior to the marriage, the party who took out the loan is responsible for paying it off. Student loans taken out during the marriage are subject to state laws governing divorce debt allocations.
In most states, that means that both spouses could be equally responsible for 50% of the overall household debt, which includes student loans. This can be negotiated in divorce court, particularly if one spouse is the clear financial supporter of the other. The judge may decide that the “breadwinner” is responsible for a larger portion.
Another factor that’s taken into consideration is if one spouse works for a company that pays off student loans. The judge can determine whether that contribution counts towards the spousal obligation to pay their portion of the overall debt. This is an area where negotiations can get complicated, so it’s recommended that you hire a good divorce attorney.
Divorce and Student Loan Debt Consolidation
Spouses who took out student loans prior to marriage, then pursued student loan debt consolidation with their spouse, could find themselves responsible for half or more of that consolidated debt in a divorce. Consolidation is essentially taking out a new loan, discharging the original debt, so it’s treated differently under the eyes of the law.
Potential consequences due to divorce is only one of the reasons why spouse’s student loans shouldn’t be combined during the marriage. There are also ramifications for student loan debt forgiveness programs like the Public Service Loan Forgiveness (PSLF) program. It’s a waiver program for public service workers that’s nullified if you consolidate your debt.
On the positive side, if the interest rate on the original student loans is high and spouses are required by law to “split the bill,” a consolidation loan could be a solution that reduces the liability of both parties. Of course, that means engaging in another business transaction with each other. That can only work if the divorce is amicable.
Prioritizing the Payment of Divorce-Decreed Student Loan Debt
Violating the terms of a legal divorce agreement can lead to serious consequences. For instance, failure to pay court-ordered student loan debt could result in a wage garnishment or seizure of assets. Some divorcees need to choose whether to pay off student loans or buy a house. It’s best to eliminate the existing debt before taking on a new mortgage.
The same dilemma doesn’t necessarily exist with the question of whether to pay off student loans or invest in your 401(k) or investment portfolio. Investments are savings, but with a higher rate of return. Continue with your savings and investment plan while paying off divorce debt, then increase your contributions when the debt has been resolved.
The Bottom Line: Student Loan Debt is an Issue in Divorces
In a perfect world, it would be a simple matter of each spouse paying off their own debts when they get divorced. Real life doesn’t work that way. Marriage is a financial merger. Assets and liabilities are combined and need to be separated when the marriage ends. If you can mutually agree to split everything, that’s great. If not, hire a good divorce attorney. The situation could get complicated, particularly when it comes to dividing up your debts.