By: Leslie Silva, Esq.
Like most couples, many do not plan to divorce.
When you tie the knot, you may think that all your benefits and burdens will be shared with your partner until death do you part. But sometimes life takes you in different directions. Dividing your stuff and going down different paths can 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 set to end on August 31, 2022, the student debt split is getting more attention. Many couples have put aside the difficult conversations that come with managing their loans over the past two years as student loan forbearance has been implemented in response to the economic crisis caused by COVID-19.
Even though it’s no longer possible to consolidate federal student loans with your spouse, many couples who tried to take advantage of this program are now stuck repaying those loans, whether for better or for worse. .
Some private lenders still consolidate the loans of a married couple. But be careful. 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 divide it, otherwise you may be forced to repay a loan that you have not contracted.
What are jointly consolidated student loans?
Let’s first look at why joint loan consolidation 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 student loans into one, resulting in one monthly payment as opposed to multiple payments. Additionally, loan consolidation plans can give you access to different payment methods and rebate programs, as discussed further on the Federal Student Aid website.
Sounds good, right?
Well, while there are plenty of benefits for couples looking to simplify their monthly payments, there are plenty of downsides that are often overlooked. For example, jointly consolidating a loan usually increases the amount of time you have to repay the loan, thereby increasing the amount of interest and payments you would make if you hadn’t consolidated them. Plus, the unpaid interest on your original loans wouldn’t just disappear; it would be 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 lead you to pay interest on a larger capital than expected.
Jointly consolidated loans in practice
For example, in a recent NPR story, a couple got married while in college and decided to jointly consolidate their student loans through a program with the Department of Education offering a rate of lower interest and one payment per month. While at the time the Wife thought it would be a good idea since as a couple they would tackle payments together, after their relationship soured and they separated, their loans became much more difficult to manage.
In documents released to NPR, the husband was shown to have made no regular payments on the loan since 2016, despite taking on nearly double the amount of the wife’s student debt. Now hooked as the original signer of the jointly consolidated loan, and with nearly $200,000 owed – five times the original amount of the wife’s original loan – she finds herself stuck with higher monthly payments and an insurmountable number of out-of-pocket payments. perform since the program had no way of sorting out the debts of the two.
With approximately over 14,000 borrowers who have participated in this program, this unfortunate situation has played out in multiple relationships, and things only get worse in those that are not amicable. It is important to remember that if a couple chooses to consolidate their loans during their marriage, the obligation to repay these loans must be settled at the time of the divorce. It can be even more complicated if the loan funds were used for living expenses during the marriage.
The use of the funds and the source of their origin will be important factors for the Court to analyze in determining the appropriate allocation of responsibility for the debt. Finally, other practical issues may arise, such as any missed payments that could impact your credit score.
While many borrowers have benefited greatly from the extended federal student loan forbearance, that will change in just a few months, with payments set 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, developing a properly enforceable plan to pay off your jointly consolidated debts could do the trick. the difference between maintaining your financial freedom and the burden of loans you didn’t take out in the first place.
Leslie Silva is a partner in the Albany office of Tully Rinckey PLLC, where she practices family and matrimonial law and education law. Leslie has represented individuals in all areas of family and matrimonial law, with particular experience in high net worth matrimonial litigation. She can be reached at [email protected] or at (518) 218-7100.