Debt After Divorce – How Your Ex’s Student Loans Can Follow You Out Of Your Marriage – Saratogian
By: Leslie Silva, Esq.
Like most couples, many do not plan on getting divorced.
As you tie the knot, you may think that all your blessings and burdens will be shared with your partner until death do you part. But sometimes life takes you in different directions. It can make sense to separate your things and go your separate ways; However, when it comes to sharing finances, namely loans and other debt, things can get tricky.
With President Biden’s student loan deferral set to end on August 31, 2022, student debt sharing is getting more attention. Many couples have pushed aside the difficult conversations involved in managing their loans over the past two years while student loan deferrals were introduced in response to the economic crisis caused by COVID-19.
Even though it is no longer possible to consolidate student loans with your spouse nationwide, many couples who have attempted to avail this program are now prevented from repaying those loans, for better or for worse.
Some private lenders continue to consolidate a married couple’s loans. But be careful. If you have or are considering consolidating federal student loans together, it would be wise for you and your spouse to investigate the debts you both bring into the relationship and how you can distribute them, or you may have to repay a loan that you have not included.
What are co-consolidated student loans?
First, let’s establish why consolidating loans together is something many couples consider when it comes to managing their finances after marriage.
A direct consolidation loan allows you (and in this case your spouse) to consolidate multiple federal education loans into one, resulting in a single monthly payment as opposed to multiple payments. In addition, loan consolidation plans can give you access to various payment methods and forgiveness programs, as detailed on the Federal Student Aid website.
Sounds great right?
Well, while there are many perks for couples looking to simplify their monthly payments, there are many cons that are often overlooked. For example, consolidating a loan together usually increases the amount of time you have to repay the loan, and thus increases the amount of interest and payments you would pay if you hadn’t consolidated them. Additionally, any outstanding interest on your original loans would not simply go away; it would become part of the new principal balance of your consolidated loan.
This means that if your spouse has accumulated a lot of interest on their loans, consolidating your loans may result in you paying interest on a larger principal than you anticipated.
Community credit in practice
For example, in a recent NPR story, a couple married while in college and decided to consolidate their student loans together through a program with the Department of Education that offers a lower interest rate and only one payment per month. While the woman at the time thought it was a good idea since as a couple they would be tackling payments together, managing their loans became a lot harder after their relationship went sour and they broke up.
Documents given to NPR showed that the husband had not made regular payments on the loan since 2016, despite incurring almost twice as much student debt as the wife. Now she stands as the first signer of the co-consolidated loan and with nearly $200,000 in debt — five times the woman’s original loan amount — and faces higher monthly payments and an insurmountable backlog of payments since the program had no way of paying off the debt to unravel the two.
With an estimated 14,000+ borrowers participating in this program, this unfortunate situation has played out in several relationships, and things only get worse in those who are less than amicable. It’s important to remember that if a couple chooses to consolidate their loans during their marriage, the obligation to repay those loans during the divorce must be addressed. This can be further complicated if the loan funds were used for subsistence during the marriage.
The use of the funds and the source of their origin will be important factors for the Court to analyze in order to determine the appropriate allocation of debt responsibility. Finally, there are other practical problems that can arise, such as: B. Missed payments that could affect your credit score.
While many borrowers have benefited greatly from the extended federal student loan forbearance, that is set to change in just a few months, with payments expected to resume on September 1, 2022.
While it may not be the most romantic conversation with your current, future, or ex-spouse, creating a properly enforceable plan to pay off your jointly consolidated debt could mean the difference between maintaining your financial freedom and burdening yourself with loans you don’t even have just recorded.
Leslie Silva is a partner in Tully Rinckey PLLC’s Albany office, where she practices family and matrimonial law and education law. Leslie has represented individuals in all areas of family and matrimonial law and has particular experience in high net worth matrimonial disputes. She can be reached at [email protected] or at (518) 218-7100.