My Debt or Yours? How student loans are treated upon divorce.
For current and former students who are either married or contemplating marriage, it’s important to understand the intersection between student loans and community property. For spouses who do not have a prenuptial or postnuptial agreement, the "default rules" are quite complex.
Upon divorce, are student loans taken out before marriage treated differently from loans taken out during marriage?Student loans taken out before marriage will not be considered a community debt. This means that, at the time of divorce, any remaining balance on a pre-marriage student loan will only be assigned to the student spouse upon divorce. Any remaining balance on a student loan taken out during marriage, on the other hand, will also generally be assigned to the student spouse upon divorce, but there are exceptions. A Court could require a lingering student loan balance to be divided between the spouses if: (a) the student loan reduced the student spouse's need for spousal support or (b) the student loan substantially benefitted the community (for instance, if the loan proceeds were used to pay household expenses or the spouses enjoyed a higher marital standard of living due to the career that followed the student spouse's education).
Is the community entitled to a reimbursement for payments (using community funds) towards one spouse's student loans?No matter if the student loan is taken out before or during marriage, the rules below will apply upon divorce. If the student loan substantially enhanced the student spouse's earning capacity, then the community would be entitled to a reimbursement (plus interest) for any payments made on the student spouse's loans. Exceptions will apply, however, if the community substantially benefited from the student loans or if the loans reduced the student spouse's need for spousal support. The purpose behind these rules is to make sure that the community is repaid for helping one spouse obtain an education that led to a lucrative career, but if the community has already benefitted or if the non-student spouse already benefited (e.g. due to the student spouse's reduced need for support), then the community may not be entitled to full reimbursement. What this also means, however, is that the community is not entitled to a reimbursement when the student loan did not substantially enhance the student spouse's earning capacity or did not substantially benefit the community. Therefore, the community benefits two-fold (both by obtaining a right to reimbursement and by generally increasing both spouses standard of living) when student loans are used to enhance the earning capacity of one spouse. In turn, the community loses out (by losing the right to reimbursement and by not benefitting from an increase in standard of living) when student loans are not used to enhance the earning capacity of one spouse.
Can student loan creditors go after the community pot?This may be a scary answer, but yes. For student loan debts incurred prior to marriage, the community estate (i.e. both spouse's earnings and accumulations during marriage) is liable for student loan debt incurred by either spouse unless the non-student spouse's community earnings are kept in accounts from which the student spouse has no right of withdrawal and which do not contain the student spouse's community earnings. For student loan debt incurred during marriage, on the other hand, the community estate is liable for student loan debt incurred by either spouse, and segregating the non-student spouse's community earnings will not protect against creditors. However, if creditors do go after the community pot, the non-student spouse would be entitled to a reimbursement (but the claim would need to be brought against the other spouse).
How can this be simpler and less anxiety provoking?The rules regarding treatment of student loan debt during and after marriage are complex and full of exceptions. Because of this, a prenuptial or postnuptial agreement can be a great tool for many current and former students who are married or contemplating marriage. In these agreements, fiances and spouses can create a legally binding contract that sets forth whether their student loan debt will be considered a community or separate obligation and how reimbursements for payments during marriage will be handled.