How to Split $250,000 in Student Loans in a Divorce

Divorce is stressful and complicated and hurts on so many emotional and financial levels. It becomes even more complex when you throw in the additional financial stress of student loans — whether they are loans the spouses took out for their own education or for a child’s college. It can be hard to deal with even after you have decided whether a student loan is a marital or separate debt.

Student loans are a complex liability because there are so many different and complicated repayment methods. These repayment plans come with such acronyms as PAYE, REPAYE, IDR and PSLF.

The borrower’s circumstances can also play a huge factor in deciding how to deal with student loans properly. For example, you might not have to repay your student loans in total if you qualify for student loan forgiveness for various reasons. The most common are taxable long-term forgiveness or Public Service Loan Forgiveness.

How student loans are handled in a divorce can be tricky. Depending on the laws of the state in which the divorce occurs, if one of the parties incurred student debt before the marriage, it could be considered separate property. That is especially common if the borrower’s partner received no economic benefit from the student loans or if the parties come from certain states that have community property laws. (1)

But what happens if you have Parent PLUS loans that you took out for your children? Let’s imagine the case of Jack and Jill, a couple who have been married for years but are now divorcing. Let’s say that a few years ago Jill took out $250,000 of Parent PLUS loans under her name to pay for their two children’s college education.

This is a common situation. Arguably, because the Parent PLUS loans were taken out during the marriage for the benefit of their children, they ought to be considered marital debt. (1)

Analyzing the case

Jack and Jill are both 55. Jack makes $180,000 a year working for an accounting firm, and Jill makes $45,000 working for a non-profit.

Jill has $250,000 of federal Parent PLUS loans that charge a 6% interest rate. As a result, considering these loans as marital debt, Jack and Jill together expect to pay $2,776 a month, or $33,312 a year. For both Jack and Jill, it is a significant financial burden that impairs their ability to plan for retirement and other long-term goals.

What if Jack and Jill refinance?

If Jack and Jill refinance at 3%, it will reduce the monthly payments to $2,414 a month. Although the $362 monthly savings are welcome, they are not a significant improvement in their situation.

Divorce has a way of making money scarce. In many divorces, the division of assets and debts approaches 50%, meaning that the burden of paying for her half of the loans would be significantly greater on Jill, who only makes $45,000 a year. Even with an asymmetric division to reduce Jill’s share, it would likely not be easy to sustain. (2)

How their house factors into the equation

Jack and Jill have agreed to sell the family home as part of the divorce. They expected to net about $250,000 after expenses and mortgage repayment to be divided equally. Jack wants to use the proceeds from the sale to pay off the entire parent loan balance. Jack had heard horror stories about other parents not being able to retire because of parent loan payments, so he wanted to get rid of the balance and not worry about monthly payments that could continue into his retirement.

So, he and Jill decide to split the loans down the middle. It means that Jack will pay Jill $125,000 from the sale of their shared home, since the Parent PLUS loans are in Jill’s name. With that, Jack’s share of the parent loan debt is addressed, and he believes that Jill should use her share of the sale to pay her half of the debt.

One of Jill’s loan options could save big bucks

Here’s the thing. With the $125,000 that she would receive from Jack and her $125,000 share from the home sale, she could pay off the debt and move on to other issues. Jill was all in on the idea of each side paying half of the loans until she spoke to a Student Loan Strategist and decided to take a different route with the $250,000 of Parent PLUS loans still in her name.

Jill has always been passionate about providing support for vulnerable children worldwide. She works full-time at a local charity, a 501(c)(3) non-profit organization. She loves her work and has no plans to retire for at least 10 years. In this case, Jill could qualify for Public Service Loan Forgiveness (PSLF). It means that she could get her loans forgiven tax-free after she makes 120 monthly payments in an Income-Driven Repayment plan. (2)

Here is a summary of Jill’s parent loan repayment options:

Option No. 1: A flat cost of $250,000

She could make a lump-sum payment of $250,000 from the sale of their marital home ($125,000 from Jack + $125,000 of Jill’s share) to pay off the entire loan balance.

In this case, the total cost of the parent loan is $250,000. This way, Jill can get rid of the parent loans in her name. However, Jill still needs to figure out her post-divorce life, including how to pay for her new housing and how to invest the other assets she may receive from Jack from the asset division from their divorce.

Option No. 2: A cost of up to $333,062

She could keep the $250,000 proceeds and pay off the loans with the standard federal 10-year repayment plan or private refinancing.

The cost of paying off $250,000 of federal loans with a 6% interest under the default 10-year standard repayment plan is $2,776 per month and $333,062 total over the 10 years. However, if Jill could find a private refinancing deal at 3% interest for the same 10-year term, the cost is $2,414 per month and $289,682 total, which is a savings of $362 per month and $43,379 in total.

It may make sense for Jill to do that if she needed to use the $250,000 home sale proceeds to buy a new house to live in, and if she could afford the $2,000+ per month of payments for the student loans. However, this is not an attractive option for Jill since her monthly income is $3,750, and the loan payments would absorb much of it. Even if her divorce agreement provided for alimony, it would still be difficult.

Option No. 3: A cost of just $29,766

Finally, Jill could enroll in an Income-Driven Repayment plan and pursue Public Service Loan Forgiveness (PSLF).

Typically, federal Parent PLUS loans are only eligible for one of the Income-Driven Repayment plans, called the Income-Contingent Repayment (ICR) plan, even after being consolidated into a Direct Consolidation Loan.