Many people imagine the discussions that lead up to a marriage as romantic tete-a-tetes with the occasional choice of invitation pattern thrown in. But those conversations also can, and should, include more mundane and even potentially painful topics.
One common example: the state of your student loans.
According to the New York Federal Reserve, as of the end of 2016 44.2 million Americans owed student loan debt, totaling a collective $1.31 trillion. For the most recent year’s graduating class, the average debt per student was $37,172. So unless you specifically refuse to date anyone with student loans – a dating strategy that is rare, though not unheard of – the odds are that you, your future spouse or both will bring at least some student loan debt to your married life.
Whether you are the partner with more debt or with less, you should understand the ways in which marriage will – and will not – change your student loan situation.
For many couples, one of the largest concerns is whether each spouse will be on the hook for the other’s student loan debt. In most cases, the answer is no; legally, a student loan borrower’s spouse is generally not responsible for the debt unless he or she co-signed for the loan. However, most cases are not every case. Depending on the type of loan and where you live, some exceptions exist.
If you and your spouse live in a community property state, state law presumes that debts incurred by either of you during your marriage are owed by both of you, regardless of whether both of you signed the paperwork. This means that any debt you bring to the marriage remains in one spouse’s name only. However, any student loans taken out after you say “I do” will become joint debt. Some community property states take a more nuanced position on this than others when it comes to student loans, however, so it is important to research your particular state’s law. The type of loan also matters. Even in community property states, federal student loans are generally exempted from this standard treatment and are treated as individual debt, regardless of whether you take them out before or after getting married. Private student loans may or may not be handled the same way; again, it varies from state to state.
A divorce or separation may also further complicate the issue of who is responsible for student loan debt in certain jurisdictions, at least for debt incurred during the marriage. Many states give divorce courts the discretion to divide marital property holistically, which means a judge may consider factors such as each spouse’s ability to pay or who benefitted from the loan, regardless of who signed his or her name.
Another complication is that some states, including New York, view a professional degree earned during the marriage to be marital property. In those instances, the spouse who earned the degree may be expected to compensate the other party for supporting the work required to earn it. Courts have sometimes awarded more property to the spouse who did not go to school to offset the value of his or her partner’s degree. Without a prenuptial agreement specifying otherwise, in a worst-case scenario a partner who went back to law school, for instance, could end up responsible for most or all of the resulting debt and with a lesser share of liquid assets with which to pay it back.
Even if you are not legally responsible for your spouse’s student loans in any way, they can affect your overall financial picture during your marriage. Most directly, every dollar your spouse spends paying down debt cannot go toward your joint bills, savings or other financial goals. Couples need to have frank discussions about how the debt will affect both their monthly budget and their long-term planning. There are many sensible ways to approach paying back debt, but they all involve sacrifices. It is important to be sure from the beginning that both of you agree on which sacrifices you plan to make, whether they take the form of a lower standard of living, moving somewhere less expensive, delaying children, or reducing or forgoing travel and other discretionary spending for the time being.
Another common question is how marrying someone with significant student loan debt will affect your credit score. The short answer is that your spouse’s credit will not directly impact your score at all. However, your spouse’s credit score will become important the moment the two of you want to buy a house, finance a car or apply for any other sort of loan as a couple. It is worth noting that student loan debt, even in large amounts, does not necessarily indicate a bad credit score; to the contrary, if the borrower has made faithful payments on the debt, his or her score may be excellent. On the other hand, if one of you has been delinquent in payments, or even gone so far as to default, it could seriously affect your ability to secure credit in the future as a couple.
If both of you owe student loans, you may wonder if you can consolidate them into a single payment. Unfortunately, this is not allowed. You can refinance or consolidate as individuals, but not as a couple, ever since the Higher Education Act of 2005 forbade the practice. Although you cannot refinance together, it may be a good idea for one or both of you to explore refinancing all the same. It is likely your credit score has improved since early adulthood, and you can likely secure a better rate as a result.
Marriage may introduce a complication for certain couples where one or both spouses are paying back loans on an income-based repayment plan. This factor may contribute to a decision on how to file your taxes after the wedding. Married couples may file either jointly or separately, and both options have consequences. For many couples, filing jointly results in a lower overall tax bill. But if your repayment plan is based on your income, filing jointly could potentially dramatically increase your monthly payment amount, or even mean sacrificing your eligibility for income-based repayment altogether.
If you choose to file jointly, you may want to investigate an Income-Contingent Repayment (ICR) plan. Such plans do not involve an income eligibility requirement, but do base your payment on your income level. However, you will want to carefully consider the big picture, since ICR plan payments can end up higher than even the standard repayment plan. It may be wise to consult a Certified Financial Planner™ or other expert who can help you determine the most cost-effective way forward in your specific circumstances.
One other potential tax pitfall for married couples is the student loan interest deduction. As a single filer, you can deduct up to $2,500 of the interest you paid the prior tax year as long as your modified adjusted gross income (MAGI) is less than $65,000; beyond that, the deduction is reduced until your MAGI reaches $80,000, at which point you are no longer eligible. While the income limits double for married couples who file jointly – you can deduct the full amount with a MAGI of up to $130,000 and part of it up to $160,000 – there is a catch. As a couple, you can only claim one $2,500 deduction together, even if each of you paid that much or more individually. And if you decide to file separately, neither of you can claim the interest deduction at all.
Few couples just starting out their lives together want to dwell on the possibility of one of them outliving the other. But if you are widowed and your partner still owed a balance on his or her student loans, will you need to repay the loan? Generally not. All federal student loans and many private student loans offer a death discharge in case of the original borrower’s death. However, some private loans may not carry this provision, so it is important to know the terms and conditions of your spouse’s loan in advance.
According to the National Foundation for Credit Counseling, 37 percent of respondents said they would not marry their partner until he or she was completely debt-free. While this decision is their prerogative, the truth is that student loans don’t need to be a deal-breaker for a couple ready to start a life together. What is more important is the ability to talk honestly and thoroughly about your financial present and future – before the rice begins to fly.