to what extent am I responsible for my wife's student loan?

Question

My wife has a substantial student loan (in excess of $100k) which she aquired before we were married. We have a prenup and no community property.

She currently is not working and my income is not sufficient make payments on the loan. She is no longer active in the field in which she got her degree; in fact, she can no longer even work in her field because the fees to remain active were become too burdensome as her income tapered off.

It is not economically viable for her to find other work, because if she did work, her deferment would end and she would have to start repaying the loan and it would take up most if not all of the income she would be making (as she would have to find a lower paying job outside her field). And at the same time, we would suddenly have significant child care expenses, and this would not fit into our budget either.

Student loans can't be discharged, ever, as long as you are alive. My understanding is that there are income based repayments, but since she doesn't have an income, I don't see how this would work either. So we are stuck with repayments we cannot afford, and no way to get rid of them. It appears our only choice is to simply never pay them. I am not sure how anybody can force us to pay, as she has no income, our property is separate, and I have no income tax refunds coming. But, I would feel like there was an ever increasing weigh hanging over our head that could unexpectedly wipe us out at any time.

However far should I go to try to pay off my wife's student loans? I don't think legally I have any obligation to, but if I had to, I could, for example cash in my 401k and sell off the few other assets I have and possibly clear enough to pay it off, so that she could work again in the future if she wanted. I hardly see how this is prudent, considering that I am over 45k and the financial calculators I use suggest that given my current net work and ability to save, I only have a 17% of my current retirement plan lasting me until I die.

What obligation do I have (legally and/or morally), and to what extent should I consider sacrificing my future for this?

Answer 1

As other's have mentioned Income-based repayment plans should help if she has federal loans. The payment is based on your income and after 25 years the loans will be forgiven. However, the forgiveness of the remaining balance after 25 years in repayment is considered taxable income. Private loans aren't as flexible, so the above doesn't apply. You would need to check with the companies that have the loans to see if they offer any programs.

Two other things I will mention is that you should check into Public Service Loan Forgiveness Program for people who go into public service with federal loans. There are terms and conditions you will need to research but I believe it will forgive the loans within 10 years if you are the public/nonprofit sector. The taxable income on the balance applies to this as well I think. You should also look into whether filing your taxes under Married Filing Separately would help you out.

You would need to check with a lawyer to see what your obligations are. From what research I have done, because the loans were taken out before you were married, only your wife is responsible for the loans.

Answer 2

TL;DR: Your income is only included if you want, and doing a repayment plan will almost certainly benefit you in your current situation.

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I am way late to this game, but figured I would share what I had found (particularly if anyone else is looking as I was). For this I am going to refer to the Federal Student Aid site throughout. The most important thing to note is that this only applies to Federal Loans - private loans are a different monster (a lawyer would be a good person to talk to there).

Ultimately the separation of finances is irrelevant. What matters is if you file taxes jointly or not. She can still file for an income-driven repayment plan (IDRP) if you file jointly, you just might wind up with a monthly payment amount. If you do not file jointly your spouse reports $0 AGI and thus pays $0 per month for up to 20 years. If she gets a paying job, her AGI increases and her payments increase, but the model will follow my description below for filing jointly. Interesting to note here is that currently even if you file separately and you claim all children, she would still report your total household size. Note that even though you might pay more taxes from filing separately, you could still (easily) windup saving money.

For filing jointly, you would calculate your total AGI and she would report that as hers (since you operate as a single entity). Note since this uses AGI, paying for health insurance and contributing to a 401k both reduce your income for IDRP purposes (among other things). You then take the difference between your AGI and 150% of the poverty line (this varies by state and household size, seen here). Any amount remaining (termed "Discretionary Income") qualifies for an IDRP, though which one depends more on your specific situation (largely based on when your loan was dispered - the linked student aid site provides more details and links to a calculator). The max you end up paying is 20% of the Discretionary Income you calculated, and the maximum term is 25 years. As BakerAker said, you can drop this to 10 years with public service, and it is worth noting that many jobs (potentially as much as 25% of all jobs) qualify.

Final word of "caution" - all of this is set up through various laws, which are of course subject to change. Given the current political discourse I would expect more leniency in the future, not less, but you never can be sure. I would still take the plan in your shoes - even if you do have to pay a larger share later or continue paying longer, it is likely the savings you get now will greatly outweigh the potential changes (assuming someone even does change anything to the plan you sign on to - looking at the plans listed it appears a line in the sand is drawn and only people signing on after are affected).

Answer 3

A couple of questions and I'll add to this answer as these questions are answered:

1. What was her plan/your plan together to paying off this student loan before the two of you married?
2. You wrote that she has no income and in another question that the two of you have (a) kid(s); was this how the situation was before you married, she wasn't working?

For liability of the loan, you will need to check with your state laws. In my state, if I had a loan before I was married, within a certain time frame, post divorce, only I would be responsible for it (this gets complicated if marriage is for a longer length of time because of alimony, child support, asset division, etc relative to me and my spouses' wages, meaning that loans and assets may be used in negotiation). You will have to speak with an attorney about this and one who's expertise involves how the state looks at marriage, debt and assets.

As the answer above mentions, you have the option for prepayment based on income but in the other question, it sounds like your income is high and this may not be an issue, though you should investigate it. Two of my friends have tried this with their spouses' loan and failed because their income was high even though their spouse didn't work.

As for defaulting, from what I've seen with friends, if you default on a student loan, they do have the ability to take you to court over this (all of the friends who've tried within a few years were in court). Before defaulting, consult with an attorney and ensure that this couldn't go negative in anyway. Also, be sure to have evidence that your spouse agreed to this - what happens if in a conflict your spouse asserts that you bullied her into not paying back the loan (student loans have the interest added back to the principal, meaning the balance will grow over time and you'll owe even more). Not paying back a loan can really work against you if you're not careful. This isn't to scare you, but to warn you that getting out of responsibility can come with high costs.