Student loans: Who is responsible for all that debt in a divorce?

Paying off student loans is, of course, a huge problem. But often overlooked is how complicated it becomes when couples are in the middle of a divorce.

The average American household owes $58,957 in student loan debt, according to the Chamber of Commerce. It can be debt the spouses incurred for their own education or money borrowed for their children’s college education.

Getting a divorce can be a stressful and painful process that becomes aggravated when it comes to deciding who is responsible for student loan debt.

As student loan repayments begin, divorcing spouses need to consider who is responsible for the loan as it has a major impact on the distribution of assets and debt, including any income-driven repayments that might offer a loan discharge or forgiveness.

"Student loan debt often represents the greatest financial burden for many borrowers, sometimes even surpassing the amount owed on their home," Melody King, an attorney at the North Carolina firm of Ward & Smith, told Yahoo Finance. "With so much at stake, proper classification, valuation, and distribution of student loan debt is vital."

Read more: Worried about when student loan repayments resume? These programs could help.

Because divorce law varies from state to state, it is important that divorcing spouses inform their attorney about student loan debt and any possibility of getting that debt discharged through loan forgiveness programs like the public service loan forgiveness program (PSLF) to determine if the debt is considered marital debt.

Responsibility for the debt often depends on who benefitted from the debt and income that was earned from the career that benefited from the education requiring that debt.

Student loans as marital debt

Because family law depends on the state of residence, rules regarding student loan debt as marital property will vary.

First things first, said King: “If you weren’t married when you took out debt, then it’s not marital debt … If it was taken out while married, then it’s marital debt, but if part was taken out while married, the portion taken out during marriage is marital debt.”

However, the fact that the debt was taken out during the marriage isn’t the final consideration. Some states consider whether the couple lived together while the borrowing spouse was in school and whether the marriage benefited from the debt.

"If the borrowing spouse obtained a degree, some states look at whether the marriage lasted long enough for the household to benefit from the degree—or if an income increase resulted from retaining a loan and the non-borrowing spouse benefited from the degree," King said.

The situation can become even more problematic if both spouses consolidated their loans using the joint spousal loan consolidation. Previously, the Education Department allowed married couples to consolidate their federal student loan debt into one monthly payment — an option no longer available.

In the past, spouses that jointly consolidated their federal student loans had no way to separate those loans upon divorce.

About 14,000 borrowers were still responsible for spousal debt even after divorce as a result of joint loan consolidation, according to an NPR investigation.

But last year, Congress passed the Joint Consolidation Loan Separation Act of 2021. Now divorcing spouses that jointly consolidated student loan debt can split or separate the loan with each person applying for a Direct Consolidation Loan.

Eligibility for loan discharge impacts asset distribution

If either spouse is eligible for a loan discharge from enrollment in an income-driven repayment (IDR) plan or PSLF, that will go into the calculation of the distribution of assets and debt.

Within the past year, more than 715,000 borrowers received a PSLF discharge and 804,000 borrowers received an IDR discharge.

If either spouse received a loan discharge, that would impact the distribution of assets in divorce proceedings.

“If the borrowing spouse is eligible for public service loan forgiveness in 10 years or a IDR loan discharge in 20 or 25 years, that impacts the distribution of assets and debts,” King said. “It matters if discharge is in the foreseeable future and has tax implications at the federal and state level.”

Loans for dependent children

Aside from student loan debt taken out by a spouse, the other consideration is debt taken out for children, like Parent PLUS loans or private student loans.

"Parent PLUS loans for children are typically considered marital debt and it doesn’t matter that the loan is in one spouse’s name, as long as when it was taken out both parents were aware and knew," King said.

Read more: Federal PLUS Loans: How do they work?

There is one exception. If the couple is separated and one spouse takes out debt for the child’s education, that might not be considered marital debt.

As student loan payments restart and some loans are being discharged, divorcing spouses need to make sure that the details of their student loan debt and possible loan forgiveness are disclosed to their attorney to determine the distribution of assets and debts.

Ronda is a personal finance senior reporter for Yahoo Finance and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda.

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