Student loans regulations can sometimes seem as complex, and as important, as the Magna Carta. What are a borrower's responsibilities? I came across
this disturbing article a couple of weeks ago: http://nypost.com/2014/09/10/seniors-are-struggling-with-student-debt-too/. In addition to recent graduates, senior
citizens are also repaying student loans. It appears that some of this debt
belongs comes from seniors’ own debt. In other cases, parents who took out PLUS
loans for their children’s education hold the debt. This brings up an
interesting question. Who is legally responsible for repaying federal student
loan debt? The answer is, in most cases, the individual borrower
himself/herself. Most cases, that is. Here is a breakdown of various
circumstances.
*Death of
borrower (Federal loans): If the
borrower dies, then 100% of the balance is canceled. This is true for federal
loans, not necessarily private. If the borrower was the only one responsible
for the loan, then the IRS will not treat this canceled balance as taxable
income. On the other hand, if the loan is a Parent PLUS loan, the parent who
signed the loan document will get a bill from the IRS. Ouch indeed. Here are
some resources that address this issue:
*Marriage of
borrower (states that are NOT community property states): If a borrower gets
married, his or her spouse is NOT legally responsible for the other person's federal
student loans. These loans will stay on the borrower’s credit report and will
NOT make their way onto a spouse’s. A spouse also cannot be sued for the
borrower’s student loans. Similarly, in the event of divorce, the borrower’s
loans will remain his or her responsibility.
*Marriage of
borrower (community property states): Community property states are as follows:
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington,
and Wisconsin. In these states, debts incurred before the marriage remain the
responsibility of the borrower. Debts incurred after the marriage are usually
considered to be the responsibility of both people in the marriage. A judge may
assign liability to both parties in the event of divorce. However, federal
student loans may not fit into this category. Each state has its own regulations
on this issue. If you live in one of these states, it might be a good idea to
consult an attorney to get the specifics.
*Marriage and
monthly payment amount: Although you may not be legally responsible for
repaying your spouse’s student loans, your income could still be used to calculate
his/her monthly payments. ICR, IBR, and PAYE are great options for people who
need them. Under these repayment plans, your AGI (Adjusted Gross Income) is one
factor that determines what your monthly payment will be. Your AGI can be based
upon the borrower’s income alone if you file your taxes as “married filing
separately.” This comes with some tax penalties, so you should consult a CPA
before filing.
If you file
joint tax returns, then your spouse’s income will be factored into your monthly
payment. This is not all bad news….you can usually take more deductions to
reduce your combined AGI if filing jointly. The good news is that you don’t
have to commit to a single filing status for the life of the loan…you can
change your status yearly to best fit your circumstances. Still, seek a CPA.
I personally
want to keep others from being responsible for my student loans. I know this
may seem a bit ironic since I’m enrolled in Public Service Loan Forgiveness,
but it is what it is. Since my loans are federal, no one else will ever bear
their burden. Me, my loans, and I. There are some things you can do to protect
yourself and others…..
1.
Don’t
cosign for another person. This is perhaps the easiest way to protect yourself.
Even if your intentions are good, cosigning a loan is rarely a good idea! This
may not be a popular opinion. Cosigning might be the best available option for
some people….I am just unaware of such circumstances. Obviously you must make
your own decision, but check out the links below for some horror stories. Federal
loans don’t require cosigners, so this is more of a private loan issue.
2.
Consider
getting a prenup. Even if one party has only federal loans, a prenup can make
things easier from the get-go. This is especially important if you live in a
community property state. I’m not endorsing prenups in all cases….you know best
what works for you.
