How Courts are Dividing Student Loans in Divorce

Written by: Stefano Ceroni

 

Generally, Arizona community property law principles are pretty simple: any asset or debt accumulated during the course of the marriage is considered community in nature and subject to equitable division.

 

Meaning, each party is usually entitled to ½ of the community property assets and responsible for ½ of the community property debts.

 

Simple, right?

 

Not so fast. You see, the problem is that Arizona’s community property laws do not require an “equal” division of assets and debts, but an “equitable” division.

Dividing Student Loans in Divorce
Dividing Student Loans in Divorce

This subtle distinction is crucial because Arizona case law has held that “equitable” does not necessarily mean “equal.” In other words, just because an asset or debt was acquired during the course of the marriage, doesn’t mean an Arizona judge will divide it equally. By using the term “equitable,” the Arizona legislature has left room for Courts to consider the overall fairness when assigning community property assets and debts following a divorce.

 

For example, if a party used all of his or her sole and separate money (earned prior to the date of marriage) to buy a house hours after the parties said their “I dos,” few would argue that the non-contributing spouse should immediately receive an equal ½ interest in the home, especially if the parties were to get divorced the following week.

 

This example of equitable discretion is, however, a bit farfetched. In reality, it is much more difficult to determine when equitable principles should be used to deviate from the general rule that all community property should be divided 50/50. And, in today’s world, there is perhaps no greater example of how murky the equitable waters can get than when dealing with the topic of student loans in divorce.

 

According to the Federal Reserve Board of New York, over 37 million Americans have outstanding student loan balances. And, the total amount of student loan debt owed by Americans has been estimated to be as high as $1 trillion dollars. So, what does this mean in the world of community property dissolution? Well, one more thing that couples are beginning to fight over is dividing student loans in divorce.

 

The problem is, there is no easy way to equitably determine how a student loan that was taken out during the course of a marriage should be divided. The reason being, the benefits associated with the accumulation of the student loan debt are becoming increasingly hard to quantify. In a simple world, the party who received the benefit should be the party responsible for the burden. And, because the knowledge, skill and earning potential associated with an education degree cannot be divided, the benefit was usually thought to be easily assignable. And, of course, there are still plenty of cases today where the Arizona courts have followed this line of reasoning: “Your degree…your debt!”

 

This analysis, however, completely contradicts the overall public policy purpose of community property law. The concept of community property law is formulated on the idea that once two parties get married, they no longer exist as separate individuals, but rather, a single communal entity. Of course, there are some exceptions to this notion, but for the most part, everything that is acquired during the community (whether individually or together) is property of the community. The concept being, “a benefit to one is a benefit to all.”

 

For example, if a car was purchased during the marriage but used only by one spouse, no court would argue that the community did not receive a benefit. Therefore, even though a spouse may never have driven the community property car, he or she would certainly be entitled to some portion of its value (minus any encumbrances). The mere fact that one person did not use the asset is generally of little consequence.

 

So, if a court was to follow along these same strict lines of interpretation, the analysis of student loan debt would be like everything else; if accumulated during the marriage, then it is the responsibility of both parties. In reality, however, some courts are having a hard time swallowing this pill. The likely reason?

 

Student loan benefits are often thought of as extremely individual and self-serving assets. As a result, the courts are no longer presuming that a community benefit exists. Instead, they are looking deeper into what the actual debt was used for.

 

The difficulty?

 

Nowadays, student loan payments aren’t always being used strictly for tuition. In fact, a large portion of student loan disbursements are used for personal living expenses such as rent, food and bills. Obviously, in these cases, the argument can be made that the community directly benefited from the student loans. Meaning, it could be “inequitable” to assign the entire student loan debt to the degree earning spouse because both parties benefitted from the debt. Unfortunately, however, the analysis does not end here.

 

Sometimes, the community can be said to have received a benefit from the student loan disbursements even if they were used ONLY for the purpose of education. How? Consider this: What if a degree earning spouse was in medical school during the early part of a couple’s 25 year marriage? And, let’s say that during this time, all of the degree earning spouse’s medical school loans were used exclusively for tuition. Can it fairly be said that the non-degree earning spouse received no benefit from the student loans? (Remember, the doctor is the only one with the degree).

 

Surely, after years of practicing medicine, the doctor would have received a high paying salary– a salary which likely contributed to the purchase of many other high valued community property assets (i.e. house(s), cars, investments, etc.), all of which are now subject to equitable division. Obviously, in this case, an argument can be made that the non-degree earning spouse received a benefit from the doctor’s student loan debt.

See the problem?

 

In order for a fair and “equitable” decision to be made regarding the allocation of one party’s student loan debt, an intense analysis of the individual facts will have to be made. So, how will this play out in court? Well, each judge is likely going to decide the issue of student loans differently, according to the individual facts of each case and according to his or her own perceptions of what is “equitable.”

 

What does this mean for you if you are trying to figure out how to divide student loans in divorce? Unfortunately, it means that there is no way to precisely predict whether or not your spouse’s degree will become your debt.

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