DIVISION OF STUDENT LOANS IN DIVORCE CASES
© 2001 National Legal Research Group, Inc.
When dividing the marital estate, most states require that the courts consider the parties' debts as well as their assets. In states which recognize the concept of marital and separate property, the courts generally recognize by analogy the concept of marital and separate debts. Marital debts are those incurred for a valid marital purpose; separate debts are those incurred for a nonmarital purpose. A marital purpose is ordinarily one which benefits both parties. Note that the concept of marital property is included with the definition of joint benefit, so that a debt incurred to purchase golf clubs for the husband is a marital debt if the clubs are marital property, even if the clubs are actually used only by the husband. Marital debts are divided equitably between the parties; separate debts are assigned to the spouse who incurred them. See generally Brett R. Turner, Equitable Distribution of Property 6.29 (2d ed. 1994 & Supp. 2000).
The present article will discuss the classification and division of student loans. A student loan is generally a debt incurred by the parties for the purpose of financing college or graduate school education. In some cases, the loan proceeds will be used to pay the direct costs of education; in some cases, they will be used to support the parties while one or both are in school; in many cases, the proceeds may be used for both purposes. The question at issue is which spouse or spouses should be responsible for future payments on a student loan after the divorce is over.
Costs of Education.
Like other marital debts, the classification of a student loan depends upon the purpose for which it was incurred. When the purpose of the loan was to pay the costs of attaining a specific degree, a large majority of states hold that the degree is not marital property. Turner, supra, 6.20. Since the purpose of the loan was to obtain something which was not marital property, one court reasoned that the loan is a separate debt of the student spouse.
The majority of the loans in question are directly tied to Ritchie's acquisition of his medical licenses. Inman v. Inman, Ky., 648 S.W.2d 847 (1982), plainly states that a professional degree cannot be considered marital property. Thus, we are persuaded that the debt attendant to the acquisition of a nonmarital asset must be borne by the party who will reap the benefit from it.
Van Bussum v. Van Bussum, 728 S.W.2d 538, 539 (Ky. Ct. App. 1987).
The reasoning of Van Bussum is oversimplistic. To begin with, a degree is not, as the court stated, a "nonmarital asset." It is, instead, an interest which does not constitute "property" to begin with. It is not either marital or separate property; it is something else altogether. Turner, supra, 5.06, 6.20. Because a degree is not separate property, it is incorrect to reason that a student loan is incurred to acquire separate property. See Roberts v. Roberts, 670 N.E.2d 72 (Ind. Ct. App. 1996) (even though husband's degree was not marital property, student loan was still a marital obligation).
A student loan is, of course, incurred for the purpose of improving the recipient's future earning capacity, and therefore of acquiring more property in the future. If the parties are divorced immediately after graduation, so that the nonstudent spouse will not receive any of the anticipated future earnings, the loan did benefit only one party, and it should be treated as a separate debt. This was the reasoning in a Minnesota case:
The parties' marriage continued after appellant completed his schooling, but he was essentially unemployed during this time. . . . Both appellant and respondent have realized very little, if any, monetary benefit from appellant's education. Any benefit that may have been realized thus far as a result of appellant's education has apparently been of a non-financial nature, benefitting only appellant. We find no abuse of discretion in the trial court's allocation of student loan responsibility solely to appellant.
Tasker v. Tasker, 395 N.W.2d 100, 105 (Minn. Ct. App. 1986); see also Simmons v. Simmons, 244 Conn. 158, 708 A.2d 949 (1998) (proper to award all loans to husband where divorce occurred three years into husband's residency); Roberts v. Roberts, 670 N.E.2d 72 (Ind. Ct. App. 1996) (proper to award husband all of his student loans where parties separated two months before husband's graduation from law school); In re Reininghaus, 817 P.2d 1159 (Mont. 1991) (wife properly was awarded student loans where she was apparently still in school at the time of divorce).
There is a very significant difference between Van Bussum and Tasker. Van Bussum holds that degrees are always separate property, so that student loans incurred to acquire degrees are always separate debts. Tasker held that the increased income from the degree benefited only the student spouse so that the degree was separate property. But it reached this conclusion on the facts, not on the law. By making a point of noting that only the student spouse had benefited from the degree, Tasker suggests that a student loan might be marital property, at least in part, in a situation where divorce occurs after some of the anticipated increased earnings have been received.
Several decisions accept the suggestion made in Tasker. In Schneider v. Schneider, 761 S.W.2d 760 (Mo. Ct. App. 1988), the wife acquired a chiroprac-tic degree during the marriage, and then practiced jointly with chiropractor-husband for several years. The court held that the wife's student loans were a marital debt, reasoning that the husband had benefited from the wife's enhanced earnings.
In Bourdon v. Bourdon, 119 N.H. 518, 403 A.2d 433 (1979), the court applied the same concept to the not-uncommon situation where both parties obtain degrees during the marriage. There, the wife incurred loans to pay for college and to maintain the marital home during her time in school. After she graduated, she used her degree to earn income for the family while the husband attended law school. The debt was doubly incurred for a marital purpose in that it maintained the marital home and gave the wife earning capacity with which to support the husband through law school. The court approved a decision charging the husband with one-third of the loan balance.
A Louisiana decision accepted the basic concept of measuring the extent of joint benefit but then took a sudden sharp turn into unsafe territory. McConathy v. McConathy, 632 So. 2d 1200 (La. Ct. App. 1994). The court stated:
[A]t the time the student loan was secured, the parties contemplated that Mr. McConathy's pursuit of a higher education would ultimately benefit the community by increasing his earning capacity. Thus, we find that the funds were obtained for "the common interests of the spouses," and they were properly classified as a community obligation.
Id. at 1207. McConathy confuses expectation with reality. The classification of a debt should depend upon the extent to which it actually benefited the parties. The court correctly noted that the debt was incurred with the expectation of joint benefit, but in many cases divorce occurs before the expected benefit is actually realized. To the extent that the debt did not actually benefit both parties, it should be nonmarital, regardless of whether there existed a higher level of expected benefit.
In measuring the extent of joint benefit from a student loan, it seems proper to take into consideration the degree to which marital funds were used to make payments on the loan. The benefit to the marriage is not the gross amount of enhanced earnings, but rather the net balance of earnings over loan payments. For example, if the former student spouse earns $30,000 per year in enhanced earnings but pays $20,000 per year in loan costs, the real benefit to the marriage is $10,000. If the balance of the loan is large or the payment schedule is particularly front-loaded, there may be no joint benefit at all. When analysis of the facts shows that payments on the debt equal or exceed the amount of enhanced earnings, the debt should be awarded entirely to the student spouse. This point has not arisen in any of the reported cases.
It does not seem proper, however, to conclude that joint benefit was offset by the use of marital funds to make payments so that there was no joint benefit at all and the student spouse should be burdened with the entire debt. Student loans are economically possible only because the amount of enhanced earnings exceeds payments on the debt. Further, in at least some cases, the duty to make loan payments is deferred for some period of time after graduation. If divorce occurs before the obligation to make loan payments begins, it is possible that the marital estate benefited from enhanced earnings without making any payments at all. In these cases, it is particularly appropriate that a portion of the loan balance be treated as a marital debt.
To the extent that student loans were used to pay family living expenses, they fall under the general rule that debt incurred to pay living expenses during the marriage are always marital obligations. This rule does not cease to apply merely because one or both parties choose to attend school rather than work. See In re Marriage of Speirs, 956 P.2d 622 (Colo. Ct. App. 1997); McConathy v. McConathy, 632 So. 2d 1200 (La. Ct. App. 1994); Hicks v. Hicks, 969 S.W.2d 840 (Mo. Ct. App. 1998); Forristall v. Forristall, 831 P.2d 1017 (Okla. Ct. App. 1992).
Some of these cases took the holding too far by holding that the entire debt was marital. In Forristall, for instance, where the parties were divorced only one year after the husband started his medical practice, the court held that the student loan was entirely marital even though the proceeds had been used to pay the direct costs of education as well as general living expenses. The debt clearly was marital to the extent of the living expenses, but the wife benefited from only a very small percentage of the husband's increased future earnings. It would seem, therefore, that a substantial part of the debt was incurred for the husband's benefit and should have been treated as nonmarital. This result was reached in Speirs, where the court allocated between the parties the portion of the debt used to pay living expenses, but it charged the former student spouse with sole responsibility for the portion used to pay for education.
Professional Degree as Marital Property.
In the minority of states which treat professional degrees as marital property, the outstanding balance of a student loan is treated as a subtraction from the future earnings which are considered in valuing the degree. Greenfield v. Greenfield, 234 A.D.2d 60, 650 N.Y.S.2d 698 (1996) (noting that balance of premarital loan should not be subtracted).
States treating student loans as marital debts have often allocated them entirely to the former student spouse. The clearest case to reach this result is Capeheart v. Capeheart, 705 N.E.2d 533 (Ind. Ct. App. 1999). The trial court in Capeheart held that the student loan was a nonmarital debt. Since Indiana does not recognize the distinction between marital and separate property, it likewise does not recognize the distinction between marital and separate debts, and the trial court's decision was quite properly reversed. But the court then held that the error was harmless because the debt equitably should have been allocated entirely to the student spouse.
Some of the decisions breaking student loans down into different portions may rely upon division rather than classification principles. Speirs may have held that the entire debt was marital, and then chosen to divide only the portion incurred to pay living expenses. Bourdon and Roberts clearly were division-stage opinions, as the states involved do not recognize the concept of separate property. Both cases are nevertheless discussed above because the concept of measuring benefit fits most logically into the law of classification. Where the extent of benefit is not considered at the classification stage, however, it is surely a proper factor to consider at the division stage.
The only decision to depart materially from the concept of joint benefit is Capeheart. The husband in that case incurred a student loan before the marriage. The court held that the debt was properly allocated to the husband because the wife did not contribute to incurring it. But the question is not whether the debt was incurred jointly; the question is whether it benefited both spouses. In Capeheart, where the parties were married for seven years, the wife clearly did benefit from the debt by sharing the husband's earnings for a period of time. That fact distinguishes Capeheart from Roberts, where separation occurred before graduation. The amount of joint benefit was probably very small, and it may well have been wise to allocate the debt entirely to the husband, considering the joint benefit only as a factor in dividing other property. But Capeheart went too far in suggesting that refusal to divide the debt was justified by the fact that the debt was incurred before the marriage. The debt was used to acquire income, and some of the income benefited both parties. It is not unreasonable to ask the marital estate to share the burden of a debt which ultimately resulted in acquisition of marital property. In a case where the marriage lasted longer, the reasoning of Capeheart could lead to unjust results.
Premarital student loans have also been treated as separate property in states which do recognize the concept of separate property. See Banton v. Parker-Banton, 756 So. 2d 155 (Fla. Dist. Ct. App. 2000). Again, this result is unfair to the extent that enhanced earnings resulting from the degree were used for marital purposes.
It is important to note that there is a distinction between division and allocation. Division is the process by which the court determines what percentage of the debt should equitably be applied to each spouse. Allocation is the process by which the court determines who should actually make future payments on the debt. Just as the court need not award each party a percentage of every asset, so is it not required to actually allocate every debt.
In the great majority of the cases, the student loans are allocated to the former student spouse. There are immense practical advantages to awarding a debt to the party the creditor holds responsible; it avoids the need for payments between parties in the event that the creditor chooses to proceed against the other spouse, and it removes the risk that a sudden declaration of bankruptcy will interfere with the court's intended division. But the fact that the loan is allocated to the student spouse reflects mere convenience. To the extent that the debt was incurred for joint benefit, an equitable share of the debt should be paid by both parties. It is most convenient to consider that share as a factor in dividing other assets or allocating other debts, but the extent of joint benefit must still be considered. Stated differently, the fact that student loans are most often allocated to the student spouse does not mean that they are ultimately divided entirely on that spouse's side of the balance sheet. Where joint benefit exists, a portion of the debt is treated as a joint obligation.
The nationwide case law has divided student loans only where the other spouse benefited substantially from the loan, either by use of the loan proceeds for family expenses or by sharing in the increased income for a substantial period of time. Where divorce occurs shortly after graduation, most of the cases hold that the loan is the sole responsibility of the former student spouse. Courts vary as to whether this result is reached as a matter of classification or a matter of division. There is not, however, any substantial body of case law forcing the nonstudent spouse to share substantial liability on a student loan in the absence of substantial joint benefit. Where joint benefit exists, the ultimate division of the debt is most often proportional to the extent of joint benefit involved. In a shorter marriage where the expected future earnings are less realized, the division is often unequal. In a longer marriage where much of the benefit has been realized, the division has generally been more equal. The division is most frequently implemented by assigning the debt entirely to the former student spouse and considering any marital interest as a factor in dividing other assets.