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These days, 70% of college graduates leave their years of higher education with not just a degree, but with student loan debt. The average student loan debt held by someone who borrowed for college is $37,132—that’s not small change. It often takes years, sometimes decades, to pay off student loan debt. In the meantime, life goes on, which means that some people with student loan get divorced.
If you are one of them, or your spouse is, you might be wondering what happens to that student loan debt when you part ways. The answer, as with many issues in divorce, depends on the circumstances. The good news for a spouse who does not want to be saddled with the other spouse’s student loan debt is that that debt is often incurred before marriage, making it the other spouse’s separate debt.
First a quick primer on how assets and debt are divided in a divorce. As you may know, Minnesota is an “equitable distribution” state. That means that marital debt and assets are divided equitably, or fairly in light of all the circumstances; in practice, this usually means about equally.
However, not all assets, or debt, are considered marital. Assets and debts acquired by either spouse before the marriage are generally considered separate, and not subject to division in divorce. That said, there are some ways that a debt that was non-marital could become marital. For instance, if you and your spouse took out a home equity loan on your marital home and used $20,000 of the proceeds to pay off your spouse’s student loan, the home equity loan would be the responsibility of both of you, even though it was used for the previously-separate student loan debt belonging to one. Likewise, if you and your spouse consolidated your non-marital student loan debt during your marriage, a court could decide that the consolidated loans are marital debt.
Of course, not all student loans are taken out prior to marriage. Could you be liable for your spouse’s student loan debt if the loan was taken out during the marriage? Possibly. Technically, that loan could be considered marital debt, even though it is only in one spouse’s name, since the debt was taken on during the marriage.
But remember that the court divides marital debt equitably. If one spouse took out a loan to get a professional degree, becoming a doctor or lawyer, they will have increased earnings due to that degree. The court may consider it unfair to burden the other spouse with the student loan debt, especially if the spouse without the degree will not reap the financial benefit of it.
That said, there are circumstances under which it is equitable to assign one spouse a portion of the other’s student loan debt acquired during the marriage. For instance, if you and your spouse used the student loan to pay for your living expenses while your spouse was in school, a court could conclude that it would be fair to divide at least part of the student loan debt incurred while married between you.
Many couples who are overwhelmed by debt and planning to divorce go through bankruptcy together while still married. This allows them to avoid the issue of dividing most debt in their divorce, and can (eventually) lead to an improved credit score after divorce. Unfortunately, most student loan debt is not dischargeable in bankruptcy, so you would still be left with that burden.
If you are concerned about student loan debt, and you don’t want to leave it up to a court to decide how student loan debt will be allocated in your divorce, you have other options. Most divorces—in fact, the vast majority—settle before they go to trial. If you settle your divorce with your spouse, the decision of how student loan debt will be addressed is in your hands.
If you and your spouse are able to reach settlement on your own, terrific. Your attorney can put your agreement into writing and make sure it complies with legal requirements. If you can’t reach an agreement on your own, your respective attorneys can help you negotiate a settlement. You can also work with a mediator, a neutral party who helps you reach resolution on issues in your divorce.
However you choose to negotiate your divorce, don’t sign a settlement agreement unless you fully understand and are comfortable with the division of assets and debt, including student loan debt. We invite you to contact Mundahl Law to schedule a consultation to discuss your student loan debt and Minnesota divorce.