The financial fallout from a divorce often catches people by surprise. When you’re going through an emotionally difficult life experience, money matters may take a back seat until the dust settles.
But addressing financial issues early on will make the transition easier. That’s why, if you or your spouse have student loans, you should understand what will happen with 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 live now. A state can either be a community property state or an equitable distribution state.
If you reside in a community property 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 community property states are:
- New Mexico
Here’s how this plays out if you get divorced in a community property state. Let’s say you went to grad school while you were married and took out $20,000 in private student loans. If you get divorced, your spouse may be required to pay back 50% of the remaining balance.
This may also apply if you got married in an equitable distribution state, but now live in a community property state. If you already had student loans when you got married, those would remain your individual responsibility after the divorce, unless both parties agree to a different arrangement.
Most states, however, are equitable distribution states. In an equitable distribution state, the judge in the divorce court will decide who is responsible for repaying the student loans. The judge will examine whether the loans were used primarily for tuition or living expenses, how much each spouse contributed and other factors.
How to Proceed If Your Spouse Co-Signed Your Student Loan
If you took out a private loan and your spouse was a co-signer, their legal responsibility will not change just because you get a divorce. They will still be liable for the loan, and it will still 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 does allow a co-signer release, you’ll have to prove that you can afford the loan by yourself. Many lenders will also require that you’ve made at least 12 consecutive on-time payments before removing the co-signer. If you have a low credit score or income, you may not qualify for a co-signer release.
Don’t count on getting a cosigner release, even if your lender claims to offer them. Lenders prefer having a cosigner because it means one more person who is legally liable for the loan.
If the lender does not offer a co-signer release, you can refinance the loan to become the sole borrower. To be eligible for a student loan refinance, you need a credit score around 660 or more, a stable income and a low debt-to-income ratio.
How to Proceed 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. That option was rescinded in 2005, but there may be some borrowers still repaying a joint consolidation loan.
The federal government does not provide a way to separate a consolidation loan. Each borrower will remain on the loan until it’s paid off or the remaining balance is forgiven.
A Divorce Agreement Doesn’t Affect the Loan Contract
When you get divorced, your spouse can agree to pay for your debts even if their name is not attached to the loan. This may do this in lieu of alimony payments or because you paid off one of their loans earlier in the marriage.
But a divorce agreement doesn’t change the loan contract, according to Boston-based student loan lawyer Adam S. Minsky. Let’s say the divorce contract states that your ex-spouse is responsible for your student loan payments. If they stop paying, the lender will go after you, not them. The lender only cares about whose name is on the original loan documents.
If this situation happens to you, you can take your ex-spouse to divorce court and ask them to resume paying. But Minsky says you shouldn’t be optimistic.
“It doesn’t work if the party who is 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 win the right to garnish the ex-spouse’s wages to recoup your losses. But if no one is making loan payments during this time, your credit score will take a hit because those non-payments will be reported to the credit bureaus. You can avoid this by resuming payments yourself.
If your spouse agrees to pay for your student loans, monitor the account every month to ensure they’re following through. You should also have money set aside to cover payments and protect your credit in case the ex-spouse fails to honor the agreement.
On-time payment history is the single most important factor in your credit score, 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 Prenups Affect Student Loans During Divorce
If you had a prenuptial agreement before getting married, the agreement in the prenup will override your state’s laws—even if you live in a community property state. For example, if the prenup states that any debt incurred individually will be that person’s sole responsibility, you can’t then make your spouse help with any student loans taken out during the marriage.
Prenups are not guaranteed to be upheld in court. If a spouse claims they were coerced or that they didn’t have proper legal representation before signing the prenup, it may be voided.
A prenup also cannot overturn a loan that one spouse co-signed for the other. For example, if your prenup said that each spouse was responsible for his or her debt and you co-signed your spouse’s loan, you’ll still be on the hook for that loan.
Divorce Could Change Your Monthly Loan Payments
If you have federal student loans and are on an income-driven repayment (IDR) plan, your monthly payments could be impacted by divorce. If you’re married, monthly payments are usually based on your joint income. But when you get divorced, 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 a year, and your monthly payment is $587 on the income-contingent repayment plan or $1,326 on the Revised Pay As You Earn (REPAYE) repayment plan.
If you get divorced, your new payment would be $567 on the ICR plan and $1,091 on the REPAYE plan. Use the official student loan simulator to see how your monthly payments might change.