After people marry, it is not uncommon for the couple to join together their finances both good and bad. In the past, the Federal government allowed spouses to jointly consolidate their student loan debt together, for which thousands of couples took advantage and obtained a jointly consolidated student loan. Couples consolidate their student loans for the same reasons as single borrowers. Couples consolidate to reduce their monthly payments, increase disposable income, decrease their interest rate, and lower the number of checks that they have to remember to write each month.
In re the Marriage of Sally and Jim – A Hypothetical
While times are good, this works quite well. The divorce decree splits both the assets and the liabilities of the parties. Let’s take the hypothetical situation of Sally and Jim. Sally is a lawyer who obtained her degree from Seattle University. Jim got his Bachelor’s degree in Communications from the University of Washington. Sally had $175,000 in outstanding student loans and Jim only had $5,000 in student loans. In 2005, they decided to jointly consolidated their student loans after they got married. Jim is working as an executive vice president for U.S. Bank, while Sally is a stay at home mom and not working as an attorney.
When Sally and Jim got divorced, the court split the assets and liabilities of the marital community between the parties. Since Sally got most of the loans before they got married, the court awarded the student loan debt to her. Sally decided that she would continue to not work since she receives $6,000 in spousal maintenance from Jim. Eventually, after spousal maintenance ends, Sally decides that she wants to work at Target earning $15 per hour. On this income, she can not afford her student loan payment of $1,820 per month. The divorce decree contains an indemnity clause. What happens?
Dissecting how divorce and jointly consolidated student loans work in practice
First off, the indemnity clause is nearly worthless. Sally can’t get an income based repayment plan because Jim makes too much money as both household’s incomes are considered for purposes of repayment under an income based repayment plan. Furthermore, once loans are jointly consolidated, Jim is still liable for 100% the loan. Once she stops making her monthly payment, the loans go into delinquency. Within 9 months, they go into default. Jim will be liable for the student loans. He not bankrupt out of it. The government can institute administrative wage garnishment, take his tax refund, and perform a multitude of other options to collect the debt. While he may be furious and want to initiate a motion to get the money from Sally, it’s likely to be a futile motion since she doesn’t make any money herself. While he may get the judgment, he won’t get the relief.
Fortunately, new couples can consolidate their loans together anymore. But there are a number of couples that still have these type of loans. If you have them, make sure your lawyer understands the difference between a regular consolidated student loan and a jointly consolidated student loan. If you’d like to learn more about student loans in general, request a copy of our student loan book by submitting a contact us request for the book. Starting in August, you will also be able to purchase the book on Amazon.com.