In the last couple of decades, the average debt accumulated by students attending four-year colleges has quadrupled, from around $10,000 per student to over $40,000 per student. For graduate students, the average debt per student is even higher.
Student loan debt has become a fact of life for many Californians. For current and former students who are 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 answer some of the big questions surrounding student debt for divorcing couples.
Frequently asked questions about student debt in divorce
Upon divorce, are student loans taken out before marriage treated differently from loans taken out during marriage?
Student loans that were taken out before marriage will not be considered community debt in California. 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.
Generally, any remaining balance on a student loan taken out during marriage will also 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:
- The student loan reduced the student spouse's need for spousal support.
- 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 pay a spouse's student loans during the marriage, is the community entitled to reimbursement for those payments upon divorce?
Regardless of whether 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, the community would be entitled to reimbursement (plus interest) for any payments made on the spouse's loans. Exceptions 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 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 if 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 (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 in divorce?
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 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 dividing debt be simpler and less anxiety-provoking during a divorce?
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 current and former students who are married or contemplating marriage.
In these agreements, fiancées 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.
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