How to Deal with Student Loans in a South Carolina Divorce

The end of a marriage brings a wave of emotional and financial challenges. As you and your spouse begin the process of separating your lives, you must divide assets, create parenting plans, and prepare for the future. Amidst these significant tasks, one of the most frequently overlooked and complex issues is debt, particularly student loans. The weight of educational debt can add another layer of stress to an already difficult time, leaving many with pressing questions about who is responsible for payments after the divorce is final.

Are Student Loans Considered Marital Property in South Carolina?

To figure out how student loans are handled, we first need to look at how South Carolina categorizes property in a divorce. The law divides property into two main types: marital and non-marital (or separate) property.

• Marital Property: This generally includes all assets and debts that either spouse acquired during the marriage. It doesn’t matter whose name is on the title or the account. If it was earned, purchased, or incurred between the wedding day and the date of filing for divorce, it is typically presumed to be marital.
• Non-Marital Property: This includes assets and debts acquired by a spouse before the marriage, as well as inheritances or gifts received by one spouse alone during the marriage.

So, where do student loans fit? The answer depends almost entirely on timing.

• Loans Taken Out Before Marriage: If you or your spouse took out student loans before you were married, that debt is generally considered non-marital property. It belongs to the individual who borrowed the money.
• Loans Taken Out During Marriage: If a student loan was taken out while you were married, it is often presumed to be a marital debt, even if it is only in one spouse’s name. This is because the law presumes that the loan was taken out for the mutual benefit of the marriage, perhaps with the goal of increasing the family’s overall earning potential.

However, this is not a rigid rule. A family court judge has the discretion to decide that a loan taken out during the marriage should remain the sole responsibility of the borrowing spouse. This is where the specifics of your situation become very important.

What Factors Does the Court Consider When Dividing Student Loan Debt?

South Carolina is an “equitable distribution” state. This means the family court will divide marital assets and debts in a way it deems fair, which does not always mean a 50/50 split. When it comes to student loans acquired during the marriage, a judge will look at several factors to determine a fair allocation of the debt.

These factors may include:

• Who Benefited from the Degree? Did the degree obtained with the loan proceeds lead to a higher household income that both spouses enjoyed? Or was the couple separated shortly after the degree was completed, meaning only the student spouse will see the future financial benefit?
• Use of Marital Funds for Payments: Were payments on the loan made using money from a joint bank account or other marital funds? If so, the non-borrowing spouse has a stronger argument that the debt was treated as a shared responsibility.
• The Earning Capacity of Each Spouse: The court will look at each person’s ability to earn income and pay off debts post-divorce. A spouse with a significantly higher earning capacity, particularly if it resulted from the degree in question, may be assigned a larger portion of the debt.
• Sacrifices Made by the Non-Borrowing Spouse: Did one spouse work to support the family while the other attended school? Did they put their own career or educational goals on hold? The court can consider these non-financial contributions when dividing the debt.
• The Overall Financial Picture: The student loan will not be viewed in a vacuum. It will be considered alongside the division of all other assets and debts, such as the house, retirement accounts, and credit card balances.
• Inclusion in Alimony: Sometimes, the court may assign the debt to the borrowing spouse but order the other spouse to pay alimony to help cover the payments.

How Does the Loan Type (Federal vs. Private) Affect the Division?

The type of student loan also plays a significant part in how it can be handled during a divorce. The options and limitations are quite different for federal loans compared to private loans.

Federal Student Loans

Federal loans are issued by the U.S. Department of Education and have unique characteristics:

• Single Borrower: They are always in the name of one person—the student. A spouse cannot be a co-signer on a federal student loan.
• Non-Transferable: A divorce decree cannot force the Department of Education to transfer the loan into the other spouse’s name. The original borrower remains legally obligated to the federal government.
• Income-Driven Repayment (IDR) Plans: These plans (like PAYE, SAVE, and IBR) calculate monthly payments based on the borrower’s income and family size. Divorce dramatically affects these calculations. After a divorce, the borrower’s “family size” decreases, and if they file taxes separately from their new spouse (if they remarry), only their income is considered. This can sometimes lower the monthly payment.
• Public Service Loan Forgiveness (PSLF): If a borrower is working toward PSLF, which forgives the remaining loan balance after 10 years of public service work, the lower payments from an IDR plan post-divorce can be a significant long-term financial benefit to them.

Because a federal loan cannot be transferred, a divorce agreement might handle it by ordering the non-borrowing spouse to make payments to the borrowing spouse to cover all or part of the monthly bill.

Private Student Loans

Private loans from banks or credit unions operate more like traditional loans:

• Co-Signers Are Common: It is possible for one spouse to have co-signed a private student loan for the other. If you co-signed your ex-spouse’s loan, you are 100% legally responsible for the full amount to the lender, regardless of what your divorce decree says. If your ex-spouse stops paying, the lender can and will come after you for the money.
• Refinancing is an Option: Private loans can often be refinanced. A common strategy in a divorce is to require the borrowing spouse to refinance the loan solely in their name, thereby removing the ex-spouse as a co-signer. This may depend on the borrowing spouse’s credit and income.
• Less Flexible Repayment: Private loans do not offer the income-driven repayment plans or forgiveness programs associated with federal loans.

What if the Loans Were Taken Out Before the Marriage?

As mentioned, debt that a spouse brings into the marriage is typically their separate, non-marital responsibility. This is the starting point for any analysis. However, a legal concept known as “transmutation” can sometimes complicate this, when non-marital property takes on marital characteristics. 

The Importance of Prenuptial and Postnuptial Agreements

The most effective way to decide how student loans will be handled in a divorce is to plan ahead. Prenuptial and postnuptial agreements can provide clarity and prevent future disputes.

• Prenuptial Agreement: Before getting married, a couple can create a prenuptial agreement that explicitly states how specific assets and debts, including student loans, will be classified. The agreement can specify that each person’s student loans, whether acquired before or during the marriage, will remain their separate property and responsibility, even if the non-borrowing spouse has voluntarily contributed to the payments.
• Postnuptial Agreement: If you are already married, you can create a postnuptial agreement. This document serves a similar purpose and can be used to define how you will handle student loans taken out during the marriage, especially if one spouse is returning to school.

These agreements allow you to make your own decisions about your finances rather than leaving them up to a court.

Practical Strategies for Managing Student Loans in Your Divorce

When negotiating your divorce settlement, there are several creative and practical ways to address student loan debt. Open communication and a willingness to find a middle ground are key.

• Asset Offset: The non-borrowing spouse might agree to take full responsibility for the student loans in exchange for receiving a larger share of a marital asset. For example, a spouse might give up their claim to a portion of a retirement account in exchange for the other spouse taking on the educational debt.
• Debt Swapping: Similar to an asset offset, you can swap debts. One spouse might agree to be solely responsible for the student loans if the other spouse agrees to be solely responsible for all the marital credit card debt.
• Refinancing to Remove a Co-Signer: As discussed earlier, if one spouse is a co-signer on a private loan, the settlement agreement should require the primary borrower to make every effort to refinance the loan in their name alone by a specific deadline.
• Indemnification Clause: Your settlement agreement should include an indemnification clause. This is a legal provision that states if the party responsible for a debt fails to pay it and the lender comes after the other party, the responsible party must reimburse the other for any costs incurred, including legal fees. This provides a layer of protection, particularly when a co-signer cannot be removed from a loan.

Work with Our Skilled South Carolina Divorce Attorneys 

Dividing assets and debts in a divorce is rarely straightforward, and the presence of student loans adds another level of complexity. Protecting your financial stability requires careful planning and skilled legal advocacy. 

At Nowell Law Firm, we are dedicated to helping you navigate every aspect of your South Carolina divorce with confidence. We take the time to examine the details of your financial situation and develop a strategy tailored to your specific goals. If you are facing a divorce and have questions about student loans or other marital debts, we are here to provide the support and guidance you need.

Schedule your consultation right away by calling us at 864-707-1785 or reaching out online.