Divorce is messy, but it’s even worse if you’ve got a joint federal student loan consolidation.
The Federal Joint Consolidation Loan was offered from the late ’90s to the mid 2000’s, and allowed married couples to consolidate their Federal student loans.
It seemed like a good idea to someone who clearly didn’t realize that sometimes a marriage simply doesn’t work out.
Unfortunately, there’s no way to separate a Federal Joint Consolidation Loan. If the married couple splits up, they both remain 100% legally liable to repay the debt.
I’ve seen a variety of divorce decrees attempt to deal with these loans, mostly in an idealistic way. All of them allocate a percentage of liability to each party, ranging from a 50/50 split to 100 percent liability on just one party. Many attempt to split it based on the percentage each contributed to the consolidated loan. For example, if one spouse owed $25,000 and the other owed $75,000, they allocate liability at 25/75.
The Problem With Apportioning Liability
Here is why:
First: expectation of repayment. An extended term fixed payment for $100,000 is about $700 a month. On a 25/75 split the parties are responsible for $175/$525 for up to 25 years. Does any attorney expect each party to make these payments religiously for 300 months with no skipped payments?
Second: federal repayment plans. What if one of the parties could take advantage of Income Based Repayment (IBR) or Public Service Loan Forgiveness (PSLF)? The extended term fixed payment plan mentioned above is not eligible for PSLF. Further, in order to get IBR, BOTH parties must submit income information. How many divorced couples would willingly turn over income information years and years after the divorce simply for the benefit of the other party? What if one or both of the parties have remarried? Should we expect everyone to share income information to allow one party PSLF? It doesn’t matter what we expect, this is what the Dept of Ed expects. This is simply unrealistic and ridiculous.
Third: liability. A divorce decree does not alter the liability of a contract or promissory note. If either party fails to pay as the decree orders, BOTH parties are liable for the failure. BOTH parties will be subject to all of the horrendous collection remedies available. Regardless of whether a party fails by accident or purposefully, the other is sure to suffer damages that may never be fixed.
Forth: they’re divorced for a reason! A good percentage of divorce occurs because of finances. Now these two are supposed to play nice to take care of this substantial debt? If they do not trust each other with financial information, IBR is out the window (so is PSLF for that matter). That means they are left with a balance based payment. Many can’t afford it even if they do cooperate. And what if one can pull their weight and the other can’t? Are these two going to communicate for the sake of protecting their own credit? Doubtful. Worse, many want to forget their ex. How can they when they are tied to them for quite possibly another 25-years, or more! It is sure to be a sore spot for any 2nd marriage.
There is another issue with these loans, they cannot be altered. This creates two problems:
- Folks who would normally qualify for PSLF cannot because they do not have the right kind of loan. Only Direct Loans qualify for Public Service Loan Forgiveness. If the Joint Consolidation Loan is a FFEL Loan, then both borrowers lose the benefit of Public Service Loan Forgiveness.
- Curing a default Joint Consolidation Loan is limited. Normally a defaulted loan can be consolidated out of default. Given the fact that this is already a consolidated loan, the only was to get back into repayment is through rehabilitation.It’s easy to envision a situation that involves a loan rehabilitated only to fall back into default when the couple splits. With nowhere to turn, the consolidated loan would likely remain in default for the rest of both borrowers’ lives.
It’s Time For Legislative Change
Congress and the Department of Education need to fix this issue NOW by allowing re-consolidation to Direct Loans for PSLF qualification and as a default cure.
There should also be a mechanism for these loans to be split up in the event of a marital split.
The Department, and taxpayers, are losing money be forcing people into default because payment options are limited through no fault of their own.
If this issue matters to you, I urge you to contact your Congressmen/women. There is no negative affect to the government’s budget to fix this particular issue.
What To Do In the Meanwhile
If you’ve got a divorce decree that calls for your former spouse to pay a portion of a joint consolidation loan, make sure he or she lives up to his or her obligations. If not, go back to court to ask for the judge to do something about it.
Talk with the collection agency handling your defaulted joint consolidation loan and see if it will allow you to make payments in exchange for holding off on enforcement through a wage garnishment or tax refund offset.
Call the Federal Student Loan Ombudsman to ask for guidance.
Consider talking with a bankruptcy lawyer to see if that may help you, even if that help is temporary.
Whatever you do, you can’t afford to sit still.