It’s tempting to be vague about a sensitive issue like money when two people are dating. But before you get into the gritty details of deciding how to manage your spouse’s student debt after the wedding, the first thing to do is figure out exactly what each of you owe. Do this well in advance of the wedding, at least six months ahead of time, especially if you aren’t even sure yourself. Dropping the burden of a huge amount of student debt into a fiancé’s lap has been known to kill a relationship, even days before the wedding.
We’ll mention this several times in connection with different points, but it’s important that you understand the full implications of “commingling.” Commingling refers to assets as well as debts that become both partners’ property/liability because of actions taken by the partners. These actions include paying off debts from a joint account, or adding a spouse as a co-signer to a loan or title after marriage. It’s perfectly natural and advisable that you and your spouse share everything, including finances, so don’t be afraid to commingle. Just be aware that it takes thorough and dedicated action to keep finances separate (see prenups).
Financial planning site Mint.com recommends one of two methods for deciding which loans to pay down first. One way is to pay off private versus federal student loans first, as the interest rate on these can increase over time. If you only have federal loans, figure out which of you has a loan with the highest interest rate and pay that first. The other school of thought is to treat the loans as separate obligations for each of you individually that you pay out of your own paychecks. In other words, you don’t commingle the debts to protect each partner in the event of divorce.
Although the details vary between states, generally, student loans secured before the marriage by either spouse remain that spouse’s separate responsibility. However, the responsibility for student loans incurred after the marriage are dependent on the state you live in. In “community property” states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin — these loans become marital liabilities, meaning both parties are held responsible for them. This means creditors can come after assets owned by either spouse, even if only one name is on the title.
If you have a federal loan like Stafford or Grad PLUS, you may have been (or still be) able to arrange your repayment on an income-based plan. (These plans are good for students who expect to go into lower-paying jobs in the public sector or who otherwise foresee a low income after graduation with which to pay off high levels of debt.) If so, be aware that living in a community property state or filing a tax return as “married filing jointly” will probably bump you up into a higher income bracket with an associated higher monthly loan payment required.
Don’t let your fiancé convince you that your financial worries will be over after you get married by just declaring bankruptcy. The Bankruptcy Abuse Prevention And Consumer Protection Act of 2005 dropped the hammer on people trying to use bankruptcy as anything other than a last resort. To be released from student loans via bankruptcy, the borrower has to prove trying to pay them off causes him “undue hardship,” i.e. you are physically unable to hold down a job. In case you’re wondering, this requirement applies to both federal and private loans.
If we burst your bubble with the “bankruptcy doesn’t work” thing, don’t think you can just string the lender along for a while until the loan disappears. For federal loans, there is no statute of limitations on how long the government can hound you for its money; it can sue you 25 years later when you’re trying to send your own kids to college. However, for private loans, a default should stop appearing on your credit report in seven years.
Of course it’s a grim area of discussion, but knowing what happens to a spouse’s student loans in the event of death is relevant to people who have high-risk jobs or hobbies. In the event of death of the borrower, federal loans are discharged. However, virtually all private lenders will seek to reclaim their money from the deceased person’s estate before the surviving spouse receives anything. If the lender can’t recover all his money from the estate, he will go after the co-signer on the loans, if there is one.
Although, as we’ve seen, a student loan debt incurred before the marriage remains the student spouse’s obligation through the duration of the marriage and after, this separate property can accidentally become community property if payments are made from joint funds. This means that in the event of divorce, creditors will have the leeway they need to come after both marriage partners, not just one. And while prenuptial agreements are not terribly romantic, they are a smart way to ensure that debts brought into the marriage stay separate.
Some people take advantage of the option of consolidating their various student loans into one package because it can lower the monthly payments and make the process simpler. But once you tie the knot, you will not have the option of consolidating your loans with your spouse’s. Congress did away with the practice in 2005 in the Higher Education Reconciliation Act, mainly because of the problems caused by the inability to split the liability in the event of divorce.