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Like most couples, many don’t plan for divorce. When tying the knot, you may think that all your boons and burdens will be shared with your partner till death do you part. But sometimes life leads you in separate directions. Dividing your things and going your separate ways may make sense; however, when it comes to splitting finances, namely loans and other debts, things can get dicey.
With President Biden’s federal student loan forbearance scheduled to end on August 31, 2022, the division of student debt is getting more attention. Many couples have pushed the tough conversations that come with managing their loans aside over the past two years, while student loan forbearance was implemented in response to the economic crisis caused by COVID-19. Even though it is no longer possible to federally consolidate student loans with your spouse, many couples who tried to take advantage of this program are now stuck paying back these loans, whether it be for better or for worse.
Some private lenders will still consolidate a married couple’s loans. But be cautious. If you have jointly consolidated federal student loans, or are considering doing so, it would be wise for you and your spouse to explore the debt you both bring into the relationship and how to distribute it, or you may be left on the hook to repay a loan you didn’t take out.
First, let’s establish why jointly consolidating loans 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 combine multiple federal education loans into one, resulting in a single monthly payment as opposed to multiple payments. Furthermore, loan consolidation plans can give you access to different payment methods and forgiveness programs, as outlined further 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, jointly consolidating a loan usually increases the period of time you will have to repay the loan, hence increasing the amount of interest and payments you would make if you had not consolidated them. Further, outstanding interest on your original loans would not simply disappear; it would become part of the new principal balance on your consolidated loan. This means that if your spouse has accumulated a lot of interest on their loans, consolidating your loans together may result in you paying interest on a larger principal sum than you anticipated.
For example, in a recent story by NPR, a couple got married while they were in college and decided to jointly consolidate their student loans through a program with the Department of Education offering a lower interest rate and only one payment a month. While at the time, the Wife thought it would be a good idea since as a couple they would tackle the payments together, after their relationship soured and they split up, their loans became much more difficult to manage. In documents given to NPR, it was shown that the Husband had not made any regular payments on the loan since 2016, despite taking out nearly double the amount of student debt the Wife had. Now on the hook as an original signer for the jointly consolidated loan, and with nearly $200,000 owed—five times the initial amount of the wife’s initial loan—she finds herself stuck with higher monthly payments and an insurmountable number of payments to make since the program had no way to disentangle the two’s debts.
With an estimated more than 14,000 borrowers who participated in this program, this unfortunate situation has played out in multiple relationships, and things only worsen in those that are less than amicable. It is important to remember that if a couple chooses to consolidate their loans during their marriage, the obligation for the repayment of those loans must be dealt with during the divorce. This can be further complicated if the loan funds were used for living expenses during the marriage. The use of the funds and the source of their origination will be important factors for the Court to analyze to determine the appropriate distribution of debt responsibility. Finally, there are additional practical issues that may arise, such as any missed payments that could impact your credit score.
While many borrowers have greatly benefited from the extended federal student loan forbearance, that will change in just a few months, with payments scheduled to resume on September 1, 2022. In the end, while it might not be the most romantic conversation to have with your current, future, or ex-partner, making a properly enforceable plan to repay your jointly consolidated debts could be the difference between maintaining your financial freedom and being burdened with loans that you didn’t take out in the first place.
Leslie Silva is a Partner at 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, with a particular experience in high-net-worth matrimonial litigation. She can be reached at email@example.com or at (518) 218-7100.