How Divorce Affects Your Student Loan Debt – Forbes Advisor
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The financial fallout from divorce often takes people by surprise. When you are having an emotionally difficult life experience, money matters can take a back seat until the dust settles.
But fixing the financial problems early on will make the transition easier. Therefore, if you or your spouse has student loans, you need to understand what will happen to them in the event of a divorce.
What you need to know about divorce and student loans
What happens to student loans during a divorce depends on where you and your spouse currently live. A state can be either a community-owned state or a state of equitable distribution.
If you reside in a community state, both parties are equally responsible for any debt accrued during the marriage, even if the debt is only in one person’s name.
The 9 states of community property are:
- New Mexico
Here’s how it works if you divorce in a community property state. Let’s say you went to college while married and took out $ 20,000 in private student loans. If you divorce, your spouse may be required to repay 50% of the remaining balance.
This may also apply if you got married in a fair distribution state, but now live in a communal property state. If you already had student loans at the time of your marriage, these would remain your individual responsibility after the divorce, unless the two parties agree to a different arrangement.
Most states, however, are evenly distributed states. In a state of equitable distribution, the divorce court judge will decide who is responsible for repaying student loans. The judge will consider whether the loans were used primarily for tuition or living expenses, how much each spouse contributed and other factors.
What to do if your spouse co-signed your student loan
If you took out a private loan and your spouse was a co-signer, their legal liability won’t change just because you get divorced. They will still be responsible for the loan, and it will always show up on their credit report.
You can request a co-signer release from your lender, but not all lenders offer this option. If a lender allows a release from the co-signer, you will need to prove that you can afford the loan on your own. Many lenders will also require that you have made at least 12 consecutive payments on time before removing the co-signer. If your credit score or income is low, you may not be eligible for co-signer authorization.
Don’t rely on a co-signer discharge, even if your lender claims to offer it. Lenders prefer to have a co-signer because it means one more person who is legally responsible for the loan.
If the lender does not offer a co-signer release, you can refinance the loan to become the sole borrower. To qualify for a student loan refinance, you need a credit score of around 660 or higher, stable income, and a low debt-to-debt ratio.
What to do if you had a joint consolidation loan
In the 1990s, the Department of Education allowed couples who both had student loans to consolidate their loans together. This option was canceled in 2005, but some borrowers may still repay a joint consolidation loan.
The federal government does not provide a way to separate a consolidation loan. Each borrower will stay on the loan until it is paid off or the balance is canceled.
A divorce agreement does not affect the loan agreement
When you divorce, your spouse may agree to pay your debts even if their name is not attached to the loan. This can replace child support payments or because you paid off one of their loans earlier in the marriage.
But a divorce agreement doesn’t change the loan agreement, according to Adam S. Minsky, a Boston-based student loan lawyer. Let’s say the divorce agreement states that your ex-spouse is responsible for your student loan payments. If they stop paying, the lender will come after you, not them. The lender only cares about whose name is on the original loan documents.
If this happens to you, you can take your ex-spouse to divorce court and ask them to take back the payment. But Minsky says you don’t have to be optimistic.
“It doesn’t work if the party that’s supposed to pay can’t pay, or if the divorce agreement isn’t specific enough about the party’s obligations,” Minsky says.
In some cases, you could sue and get the right to garnish the former spouse’s wages to recoup your losses. But if no one pays off the loan during this time, your credit score will suffer because these non-payments will be reported to the credit bureaus. You can avoid this by resuming payments yourself.
If your spouse agrees to pay off your student loans, monitor the account monthly to make sure it is moving forward. You should also have money set aside to cover payments and protect your credit in case the ex-spouse doesn’t stick to the deal.
The most important factor in your credit score is your on-time payment history, and missing a payment could result in a substantial decrease in your score. Several months of missing payments could put your loans in default.
How Marriage Contracts Affect Student Loans During Divorce
If you had a prenuptial agreement before you got married, the contract agreement will prevail over the laws of your state, even if you live in a communal property state. For example, if the marriage contract states that any debt incurred individually will be the sole responsibility of that person, then you cannot ask your spouse to help you with student loans taken out during the marriage.
Marriage contracts are not guaranteed to be upheld in court. If a spouse claims that they were coerced or did not have proper legal representation before signing the marriage contract, it can be annulled.
Neither can a marriage contract cancel a loan that one spouse has co-signed for the other. For example, if your marriage contract said each spouse was responsible for their debt, and you co-signed your spouse’s loan, you will still be responsible for that loan.
Divorce Could Change Your Monthly Loan Payments
If you have federal student loans and are on an income-based repayment plan (IDR), your monthly payments could be affected by the divorce. If you are married, the monthly payments are generally based on your joint income. But when you divorce, the payments will only be based on your income.
Let’s say you have $ 50,000 in student loans and earn $ 150,000 a year. Your spouse earns $ 35,000 per year and your monthly payment is $ 587 on the Income-Based Repayment Plan or $ 1,326 on the Revised Pay As You Earn (REPAYE) Repayment Plan.
If you divorce, your new payment will be $ 567 on the ICR plan and $ 1,091 on the REPAYMENT plan. Use the official student loan calculator to see how your monthly payments could change.