Congratulations! You said, “I do!”
Oh, the things that follow “I do”. Sometimes it’s “I don’t”, or “I won’t”. Hopefully, it’s not “I shouldn’t have”.
I’m talking purely student loans here. Recently I was quoted in a story by Nerd Wallet, titled “Should your student loans and your spouse’s get hitched?” And of course, it’s about using marriage as an advantage for paying off student loans.
Let me clarify a few things.
1) refinancing a private loan to get a better interest rate is fine and smart. It’s a win. But, refinancing a private loan to get a better interest rate by adding your spouse as a co-signer has much bigger implications.
2) refinancing a federal loan to a private loan to get a better interest rate is rarely a good idea. Doing this with your spouse is usually even worse.
3) Federal spousal consolidation loans (joint consolidation loans) aren’t something you can get anymore. I’ve blogged about how terrible they are in the past. Find it here.
Private Student Loan Refinance
If you already have a private loan, refinancing for a better interest rate is simply smart. There is no downside. Adding your spouse, however, has potential implications that should really be thought about. There is no exit from it, as I say in the article. Of course, when you’re married you see no exit. No one enters a marriage thinking, “in a few years, I’m going to divorce him/her.” If you do, well, um…I can’t comment. I’m not advocating for pre-nuptial agreements either. But, when making major financial decisions as a married couple, looking to the future is hugely important. It’s all about the “what ifs”.
When a loan is entered into either jointly or with a co-signer, (legally speaking there isn’t much difference on the liability side), understand you’re tying a rope to that additional person. There is no special treatment for a co-signer. The bank wants that extra person for extra security. Here’s a quick list of issues with a co-signed or joint loan:
1) Both equally liable for the loan.
2) Discharge requirements must be met by BOTH signers
a) A discharge for disability or bankruptcy only applies to the person who applies or files the bankruptcy. It is quite possible to leave a co-signer holding the bag.
3) Divorce does NOT terminate the legal obligation of the loan. You may not live together, but you both equally owe the bill. Being a co-signer doesn’t mean you can force a creditor to go after the other person first. Nor does being a co-signer give you a claim against the signer for damages.
4) Separating finances for “protection” doesn’t work when both names are on the loan. You are both EQUALLY liable for the debt.
Federal Student Loan Refinance
When I say refinance, I mean paying off a federal loan with a new private loan. When I say consolidation, I mean paying off a federal loan with a new federal loan. Consolidation keeps a loan federal and all federal loan benefits stay intact. Refinancing losses all the federal loan benefits.
I admit I go CRAZY when people talk about refinancing federal loans. Saving some interest is rarely a good reason to do this. You can watch my commentary here. But let me sum it up quickly for you:
1) Federal loans have flexible payments based on income and family size called Income Driven Repayment (IDR). Private loans are based on the term and interest rate on the loan. If you can’t afford your private loan, you’re in trouble.
2) Federal loans can be fixed if you screw up. Default on a federal loan and it can be saved. Default on a private loan and it’s a waiting game to see if you’re sued.
3) Federal loans have total and permanent disability discharge. If things go wrong, your loan can be discharged, tax-free, with a simple paper application. Not all private lenders offer this and often their standards for discharge are tougher.
4) Federal loans have a death discharge. The government does not pursue the borrower’s estate. Private lenders have the right to chase an estate.
Who cares about saving 2% if you can’t afford the loan? And as I say in previous posts, the extra percentage you’re paying to keep it a federal loan should be seen as a long-term disability insurance policy. If you pay off the loan, great! If you need a disability discharge, you can have it if you keep the loan federal.
Adding a Co-signer to Refinanced Federal Loan
Look back at the four points about federal loans versus private loans above. Adding a co-signer makes it even worse:
1) Just because you’re having a hardship doesn’t mean your co-signer is. Can’t afford your private loan? That’s ok, the lender will contact the co-signer for payment.
2) Default on a private loan? It’s ok if you can’t pay, the lender will go after your co-signer. Maybe the lender will hire a debt collector to harras you both. Maybe the lender will sue you both. Maybe the lender will garnish both of your wages, or put a lien on both of your homes, or go into both of your bank accounts. If you’re married but not co-signers, the non-borrowing spouse is protected: no wage garnishment, bank accounts are protected, and their share of the house is safe. State laws play a part here regarding specific details.
3) If you become disabled, that doesn’t mean your co-signer is too. The lender will go after the co-signer. If you’re lucky enough to get a disability discharge on your private loan, you leave your co-signer holding the bag.
4) If you die, the private loan lender goes after the co-signer AND maybe even your estate. If you’re married, what you thought would be left to your spouse could quite possibly be taken to pay your private loan. Could you buy life insurance to cover this? Yes, but that’s just another added expense. Factor that into your monthly student loan payment. Did you really save anything by refinancing your federal loan to private?
Look. You’re married. How you live and plan your future is between you and your spouse. But, if there’s one thing I can help you with, it’s avoiding a student loan mess. Think very, very carefully about refinancing student loans. Think very, very carefully about including your spouse in a refinance as a co-signer. And think very, very carefully about refinancing your and your spouse’s loans together. Being married doesn’t mean you lose your independence. And it doesn’t mean that keeping finances separate is a bad thing. You can support each other. without being legally obligated for each other’s debt.
Still not sure what to do? Talk to an expert. Student loans got you doubting your future? Contact me to kill the doubt.