The news has been full of headlines highlighting ballooning student loan debt. Between 1993 and 2015, the average debt accumulated by students attending four-year colleges nearly quadrupled, from $9,450 per student to $35,000, with 2015 graduates given the unenviable title of “most indebted class ever”. For graduate students, the average debt per student is even higher.
Student loan debt is becoming a regular fact of life for many, many Californians. For current and former students who are either married or contemplating marriage, it’s important to understand the intersection between student loans and community property. Spouses who have a prenuptial agreement (‘prenup’) or postnuptial agreement (‘postnup’) can opt-out of these rules, but more on that later. First, let’s talk about what the default rules are.
Upon divorce, are student loans taken out before marriage treated differently from loans taken out during marriage?
Student loans are taken out before marriage will not be considered a community debt. This means that, at the time of divorce, any remaining balance on a pre-marriage student loan will only be assigned to the student spouse upon divorce.
Any remaining balance on a student loan taken out during marriage, on the other hand, will also generally be assigned to the student spouse upon divorce, but there are exceptions. A Court could require a lingering student loan balance to be divided between the spouses if: (a) the student loan reduced the student spouse’s need for spousal support or (b) the student loan substantially benefitted the community (for instance, if the loan proceeds were used to pay household expenses or the spouses enjoyed a higher marital standard of living due to the career that followed the student spouse’s education).
If community earnings are used to make payments on one spouse’s student loans during the marriage, is the community entitled to reimbursement for those payments if the spouse’s divorce?
No matter if the student loan is taken out before or during the marriage, the rules below will apply upon divorce.
If the student loan substantially enhanced the student spouse’s earning capacity, then the community would be entitled to reimbursement (plus interest) for any payments made on the student spouse’s loans. Exceptions will apply, however, if the community substantially benefited from the student loans or if the loans reduced the student spouse’s need for spousal support. The purpose behind these rules is to make sure that the community is repaid for helping one spouse obtain an education that led to a lucrative career, but if the community has already benefitted or if the non-student spouse already benefited (e.g. due to the student spouse’s reduced need for support), then the community may not be entitled to full reimbursement.
What this also means, however, is that the community is not entitled to a reimbursement when the student loan did not substantially enhance the student spouse’s earning capacity or did not substantially benefit the community.
Therefore, the community benefits two-fold (both by obtaining a right to reimbursement and by generally increasing both spouses’ standard of living) when student loans are used to enhance the earning capacity of one spouse. In turn, the community loses out (by losing the right to reimbursement and by not benefitting from an increase in the standard of living) when student loans are not used to enhance the earning capacity of one spouse.
Can student loan creditors go after the community pot?
This may be a scary answer, but yes.
For student loan debts incurred prior to marriage, the community estate (i.e. both spouse’s earnings and accumulations during marriage) is liable for student loan debt incurred by either spouse unless the non-student spouse’s community earnings are kept in accounts from which the student spouse has no right of withdrawal and which do not contain the student spouse’s community earnings.
For student loan debt incurred during the marriage, on the other hand, the community estate is liable for student loan debt incurred by either spouse and segregating the non-student spouse’s community earnings will not protect against creditors.
However, if creditors do go after the community pot, the non-student spouse would be entitled to reimbursement (but the claim would need to be brought against the other spouse).
How can this be simpler and less anxiety-provoking?
The rules regarding the treatment of student loan debt during and after marriage are complex and full of exceptions.
Because of this, a prenuptial or postnuptial agreement can be a great tool for many current and former students who are married or contemplating marriage. In these agreements, fiancés and spouses can create a legally binding contract that sets forth whether their student loan debt will be considered a community or separate obligation and how reimbursements for payments during the marriage will be handled.
It’s not too difficult to see why we believe prenups and postnups can be wonderful tools, and we’re here to help draft a student loan prenup or postnup that fits your needs!
**Please note that this blog pertains to existing California law and is meant for informational purposes only. Please do not make decisions that will affect your future based on things you’ve read on our website. Instead, consult with a Certified Family Law Specialist, like those of LFLG – or any other you prefer – but be sure to seek out sound legal advice that pertains specifically to the facts of your case.