Divorce is stressful and complicated and hurts on so many emotional and financial levels. It becomes even more complex when you throw in the additional financial stress of student loans — whether they are loans the spouses took out for their own education or for a child’s college. It can be hard to deal with even after you have decided whether a student loan is a marital or separate debt.
Student loans are a complex liability because there are so many different and complicated repayment methods. These repayment plans come with such acronyms as PAYE, REPAYE, IDR and PSLF.
The borrower’s circumstances can also play a huge factor in deciding how to deal with student loans properly. For example, you might not have to repay your student loans in total if you qualify for student loan forgiveness for various reasons. The most common are taxable long-term forgiveness or Public Service Loan Forgiveness.
How student loans are handled in a divorce can be tricky. Depending on the laws of the state in which the divorce occurs, if one of the parties incurred student debt before the marriage, it could be considered separate property. That is especially common if the borrower’s partner received no economic benefit from the student loans or if the parties come from certain states that have community property laws. (1)
But what happens if you have Parent PLUS loans that you took out for your children? Let’s imagine the case of Jack and Jill, a couple who have been married for years but are now divorcing. Let’s say that a few years ago Jill took out $250,000 of Parent PLUS loans under her name to pay for their two children’s college education.
This is a common situation. Arguably, because the Parent PLUS loans were taken out during the marriage for the benefit of their children, they ought to be considered marital debt. (1)
Analyzing the case
Jack and Jill are both 55. Jack makes $180,000 a year working for an accounting firm, and Jill makes $45,000 working for a non-profit.
Jill has $250,000 of federal Parent PLUS loans that charge a 6% interest rate. As a result, considering these loans as marital debt, Jack and Jill together expect to pay $2,776 a month, or $33,312 a year. For both Jack and Jill, it is a significant financial burden that impairs their ability to plan for retirement and other long-term goals.
What if Jack and Jill refinance?
If Jack and Jill refinance at 3%, it will reduce the monthly payments to $2,414 a month. Although the $362 monthly savings are welcome, they are not a significant improvement in their situation.
Divorce has a way of making money scarce. In …….