Student Loan Forgiveness and Your Prenup

Nov 12, 2022 | Prenuptial Agreements, Protecting Assets

If you haven’t been living under a rock these days, then you know the President Biden administration announced a plan to help middle-class federal student loan borrowers pay off their debt. The new plan will pay off debt for each borrower up to $20,000! That is a huge win for some folks. This plan comes as a relief to the end of the pandemic pause on interest. 

U.S. News says the national average student loan debt is around $30,000. The average American with student loan debt is about to have their debt almost paid off in full! Of course, there are stipulations to this plan. There is a salary cap, meaning people that make over a certain amount of money will not qualify. You can read more details on the debt relief plan here

Debt is a sticky subject for many couples. It may be that one of you is a doctor or lawyer and has hundreds upon thousands of dollars in debt. Or maybe you just have that pesky little $10,000 left, and the Biden administration is about to take care of that for you. Either way, debt may be addressed with your future spouse. If you don’t address it in your prenup, the court will handle it with a “default prenup” (a.k.a. State divorce laws). Not to mention, depending on your assigned divorce judge, the outcome may vary, as divorce cases can be quite subjective. The best way to protect you both from each other’s debt is to put it in a prenup. 

Types of debt

There are two main categories of student loan types: federal loans and private loans. Federal student loans are supported by the government. They typically offer lower interest rates and lower borrowing limits. With federal student loans, you typically only need to start paying the loan back after you graduate. Most federal student loans don’t require a credit check. 

On the other hand, private loans are funded by banks and other financial institutions. Their interest rates may be higher with higher borrowing limits. Unlike federal loans, some private loans require you to pay them back before you graduate. Most private loans also will make you pass a credit check before they loan you anything. 

Biden’s new plan for debt relief only applies to federal student loans. Unfortunately, those who took out private loans are excluded from the debt relief. 

Addressing Debt in your Prenup

You and your honey may be worrying about debt, especially with the loan forgiveness plan fresh in everyone’s minds. You may be even more concerned if you’re someone with a large amount of debt. Not to worry–a prenup can ease all of that stress. A prenup can help spouses define ownership of debt, so it remains separate and not subject to division.

A prenuptial agreement can help couples define the ownership of their assets and debt in a way that protects the other from any liabilities. For example, you might delineate that all premarital debts will remain separate, and any debt incurred during the marriage will also remain separate. Or not. Maybe you want to keep premarital debts separate but let all debts incurred during the marriage be determined by state divorce law and apportioned accordingly. 

Keep in mind, if you choose to keep the debts incurred during the marriage separate, there’s still a chance it may become shared debt in a divorce. 

Let’s use an example to illustrate how some people may address debt in their prenup. Kate and Max get married in 2021. Kate is a doctor, and Max is a teacher. Prior to the wedding, Kate went to med school, racking up $500,000. Kate had already finished med school by the time she got married. Before the wedding, Max was stressing about all of that debt that could possibly be apportioned to him one day if things in the relationship did not work out. With his teacher salary, there’s no way he could afford it. So, they log into and get a prenup. In the prenup, they specifically state that all debt incurred prior to the marriage (i.e., Kate’s med school debt) shall be characterized as separate property and not subject to division. And voilà! A weight was lifted off of Max’s shoulders, and he created a layer of protection for himself should they ever divorce

Let’s modify that example. Kate and Max get married in 2021. Kate is a doctor, and Max is a teacher. After the wedding, Max decides to go to graduate school to get his masters in the history of insects at a very prestigious university, racking up $500,000. Kate supported Max financially throughout this educational experience, but Max took out loans for the $500,000 tuition. If Max and Kate divorce in the future, Kate could be on the hook for some of that tuition cost. Unfair, right? Kate doesn’t even care about bugs! 

What happens to debt without a prenup? 

As you can see above, in a prenuptial agreement, you can clearly state which debts are separate, even future debts. But what if you didn’t have that prenup in place? Well, your state has a present for you: it’s their “default prenup” (a.k.a. State laws on property and debt division). Yes, state law will determine what happens to your debt when you don’t have a prenup, and it may not be to your liking.

Most states follow the equitable distribution method of property division. This method assigns property and debt based on a set of factors that vary from state to state but are generally similar. Some factors may include the duration of the marriage, the age of the spouses, the health of the spouses, each spouse’s needs, each spouse’s financial contributions, and more. 

On the other hand, a minority of states follow the community property method of property division. These states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. This method splits property acquired during the marriage right down the middle, fifty-fifty. Property obtained before the marriage is considered separate property, with some exceptions. 

Regardless of which state you live in, what happens to your debt is not always a clear-cut answer. A prenup can help you completely avoid that outcome by explicitly stating premarital debt is separate, and so is debt acquired during the marriage. 

Paying off your student debt 

With the new Biden student loan forgiveness program, it’s on everyone’s minds: paying off student debt. Luckily, many Americans are about to have $10,000 to $20,000 sliced off their student debt bill. That’s a huge amount of money! For some, that will cover the rest of their loans. For others, not so much. For the doctors, lawyers, and PhDs of the world, even $20,000 is a drop in the bucket for their steep debt. So, many people will enter marriage with monthly student debt bills. What happens to the debt you start paying off during a marriage? Let’s dig into some more examples.  

Let’s say Emily and Matt got married in 2018 in California. Prior to the wedding, Emily went to law school from 2014-2017 and racked up around $200,000 in debt. This is generally considered separate debt since it was acquired prior to the marriage. Matt is a chef and has no student debt. After the wedding, Emily and Matt open up a joint bank account in which they both add and withdraw funds regularly. Emily also pays her $2,000/month student loan bill from the joint account, with Matt’s permission. If Emily and Matt were to get a divorce, does Matt have any way to recover the funds he contributed to Emily’s loans? The answer is possibly no in an equitable division state, maybe a yes in a community property state, but it really depends on your state’s divorce laws. 

What do we mean by “possibly yes?” Well, in some states, a judge may award a credit to the non-borrowing spouse who contributed to the separate student debt with a joint bank account. For example, in California (a community property state), the court may permit reimbursement for the payments made from the joint account to the helping spouse. However, the reimbursement may be reduced based on the extent to which that person or the marriage benefited from the loans and some other factors. So, if Matt really reaped the benefits of Emily’s high lawyer salary, then there’s a possibility that the reimbursement would be limited or not permitted altogether. 

“However, a prenuptial agreement can easily resolve this future contended issue by deciding now who will be responsible for the student loan debt. The prenuptial agreement may say that Emily will be solely responsible for the debt, or it could say that the community agrees to pay for it as long as Matt and Emily are married. There are many options on how to resolve this issue in a prenuptial agreement that doesn’t involve a fight in court at the time of divorce.” 

Raymond Hekmat, California family law attorney

Final Thoughts

If you or your future spouse are one of the people receiving the benefit of Biden’s student loan forgiveness program, then your debt may be diminishing drastically. Nonetheless, the debt may still exist, and you may be thinking about how to handle it going into marriage. The long and the short of it? A prenup will protect you both if you want it to. Without a prenup, your state will have a “default prenup” in place for you in the form of state divorce laws and will decide the fate of your debt based on those principles. And that very well could mean one of you absorbing the debt of the other, even if the other didn’t take out that debt. Yikes!  

HelloPrenup makes the process of getting a prenup easy. We help guide you through the creation and negotiation steps of prenup-making. Our interactive platform lets you do all of this from the comfort of your own home!

You are writing your life story. Get on the same page with a prenup. For love that lasts a lifetime, preparation is key. Safeguard your shared tomorrows, starting today.
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