What To Do About Student Loan Debt During Divorce

With student loan debt on the rise, spouses filing for dissolution may need to know how to characterize their debt and payments.  What happens when one spouse works during the marriage so the other can attend school?  What if a significant amount of community funds were used to pay down student loans?  Is there a reimbursement right? What if there is an outstanding balance owed at the time the parties dissolve their marriage?  These are important questions to ask when you are filing for divorce and either you and/or your spouse have student loan debt.

Any loan incurred during marriage for a spouse’s education or training which remains unpaid at the time of dissolution or legal separation must be assigned for payment to the spouse who obtained the education or training and is disregarded in effecting a net equal division of the community estate.  In other words, the unpaid loan cannot be included amount the community liabilities for purposes of a property division.

Regarding the issue of property rights, reimbursement for community contributions and assignment of loans pursuant to Family Code Section 2641 is the exclusive remedy of the community or a party for the education or training and any resulting earning capacity enhancement of a spouse.  Notwithstanding community expenditures toward a spouse’s education or training, the community cannot acquire an “interest” therein because a spouse’s professional education or degree is not divisible property.  California courts have held a spouse’s professional education obtained during marriage—even if paid for with community funds—is not community “property” capable of valuation and division at dissolution.

Nonetheless, when one spouse works so that the other can attend school, it is usually with the expectation that the community will benefit therefrom after the education is completed, thus obtaining a “quid pro quo” for the community’s investment.  If the marriage is dissolved before the community can realize the benefit, Family Code Section 2641 recognizes a right of reimbursement in property division proceedings to redress the economic inequity.

While there are some statutory limitations, upon marriage dissolution, the community “shall be reimbursed” for its contributions to a spouse’s education or training that “substantially enhances” the spouse’s earning capacity. While California courts have held there is no presumption that a legal, medical, accounting or other professional degree will result in a substantially enhanced earning capacity as a matter of law, unfortunately there is little guidance on what is meant by “substantial enhancement” of a student spouse’s earning capacity.