As spouses work through the division of property during a divorce, too many overlook a significant debt – student loans, as described in overview form in this article in Forbes.
A spouse who has student loans in his or her name either took the loans out prior to the marriage or during the marriage. When the loan begins does factor into the decision of how to classify the debt as separate or marital.
If a spouse has student loan debt that preceded marriage, courts generally consider that debt the separate property of the debtor spouse. However, if during the marriage the parties refinanced the loan and converted into a joint debt, it would be classified as marital property. Further, if the parties jointly contributed to paying that new debt during the marriage, those actions would only further reinforce the intent of the parties to treat the debt as marital.
If a spouse takes out a student loan during marriage, perhaps to pursue a graduate degree, that debt would be presumptively marital even if only in the name of the student spouse. If later, when payment begin, both spouses contribute to the payment, that behavior will reinforce an intent to treat the debt as a marital obligation.
The flip side of assigning the debt is determining the benefit. For example, a graduate degree earned during the marriage that led to a better job and greater family income would be an asset that the marriage enjoyed together. It would not make sense to assign all the benefit to one spouse and all the debt to the other spouse. Rather, it would make sense that the parties share in both the benefit and the burden.
What about a student loan prior to marriage that also helped the standard of living during the marriage? It would depend on the contribution of the non-student spouse. If the student spouse became a doctor, the other spouse married a doctor with debt. If the income of the doctor principally pays for the loan and the lifestyle, it would be hard to put that debt on the non-student spouse. On the other hand, if the non-student spouse helped pay off this debt, the contribution of that spouse must be considered a marital asset barring an explicit agreement by the non-student spouse to pay for some of the student spouse’s debt.
In student loan cases, it is very important to distinguish between a beneficiary of the loan by status (becoming a more educated and higher earning individual) and by contribution (helping to pay off the debt that created the status). Status alone will not obligate a non-student spouse, but contribution will definitely qualify as a marital asset.
In some cases, it may benefit both parties to classify the debt as marital because it will result in a more equitable distribution of all marital property. For instance, if a spouse has a high student loan debt that contributed to the higher standard of living, that spouse would want the debt as marital to be balanced by marital assets, whereas the other spouse will want to argue it was separate to get a fuller share of the marital assets. What would be fair? It depends on who helped pay off the debt during the marriage.
Ultimately, the goal of the court is to act fairly, which requires looking at each case individually to see when the loan occurred, who paid most of it to the point of divorce, and who benefited from it during the marriage.
If you have questions about student loans and divorce, contact us – we can help.