Student loan debt can complicate divorce settlements

As the cost of higher education continues to skyrocket, so does the amount of student loan debt that graduates are saddled with going forward. Some 70% of students who earned bachelor’s degrees in 2012 had student loans, and these loans averaged a startling $29,400. Many students who have also taken out loans for graduate or professional degrees are now leaving school with debts in six figures.

According to the Federal Reserve Board, Americans now owe more money on student loans than they owe on auto loans or credit cards.

So what happens when couples with significant student loan debt divorce? Who gets stuck having to pay off the bill?

You might assume the answer is simple – the spouse who borrowed the money for school has to pay it back. But seldom is anything simple in the world of family law. In fact, the answer depends a great deal on the unique circumstances of the couple, as well as on the law of the state where the divorce occurs.

While each case is different, here are some of the factors that may come into play:

Were the loans taken out before the marriage, or after? Generally speaking, you’re more likely to be completely on the hook for a student loan if you took it out before you got married. In such a case, you undertook the obligation all on your own, before your spouse became your life partner.

What was the money used for? Student loans most commonly cover tuition, of course, and perhaps books, lab fees and the like. But loans can also cover your rent and other living expenses while you’re a student. To the extent that a loan was used to pay your living expenses while you were married, it’s more likely that a judge might think it’s fair to let your spouse pay for part of the debt – since he or she was also helped by the funds.

Who benefited from the degree? If you incur a lot of loans for a professional degree and then file for divorce shortly after you graduate, it’s more likely that you’ll have to pay back all the debt yourself. That’s because any benefit you get from the degree in terms of enhanced earning potential will generally accrue only to you; your spouse won’t share in it.

On the other hand, if you graduated some years ago and your spouse has enjoyed a higher standard of living for some time as a result of your degree, a judge might consider the degree more of a mutual benefit, and the corresponding debt as more of a mutual obligation.

Were the loans consolidated? Sometimes, married couples consolidate their separate student loans into a single loan. If the couple later get divorced, this can make it complicated to figure out what part of the debt belongs to whom.

Who can afford it? Regardless of everything else, if one spouse has a much greater salary or earning potential than the other, a judge may take this fact into account in dividing up a couple’s debts.

What are the tax consequences? Different ways of dividing up debts (and assets) can lead to very different tax results. These should also be taken into account when deciding who gets what part of the tab.

If you or someone you know has large student loans or other debts, it might be wise to address these in a pre-nuptial agreement (or, after a marriage, in a post-nuptial agreement). This can clarify what will happen in the event of a later break-up.

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