Student Loans at Divorce

Student Loans at Divorce

By Carl O. Graham

student loans at divorce

At dissolution, one spouse has $40,000 of student loans incurred during the marriage, and is still in school, so that amount is only going to increase. What is the court to do?

There are two considerations - is the student loan a marital debt, and what impact does it have on maintenance?

Allocation of Student Loans At Divorce

Upon dividing the marital estate, the trial court is required to allocate the marital estate equitably. C.R.S. 14-10-113. Debts are in the nature of a property division. In re: Marriage of Booker, 811 P.2d 405 (Colo.App.1990), rev'd on other grounds, 833 P.2d 734 (Colo.1992).

The seminal case on the characterization of student loans is In re: Marriage of Speirs, 956 P.2d 622 (Colo. App. 1997). There, the wife earned a law degree during marriage, incurring $54,000 of student loans in the process. The husband unsuccessfully argued that because the wife’s degree was not a marital asset, In re: Marriage of Olar, 747 P.2d 676 (Colo. 1987), any debt incurred to attain that non-marital asset should be hers alone.

The Court of Appeals found that a spouse’s pursuit of higher education is often the common goal of both spouses during marriage, and both spouses expected to share in the rewards of the degree. Moreover, it is not unusual for student loan proceeds to provide general support for the family, beyond covering educational expenses. Accordingly, the court held that student loans incurred during marriage are indeed marital.

Post-Separation Student Loans

In 2016, the Court of Appeals revisited the issue of student loans in a case concerning the characterization of loans incurred by a wife after separation, but before the decree of dissolution. In re: Marriage of Morton, 2016 COA 1.

The trial court had found that the wife’s $33,000 of student loan debt incurred after separation was her own debt, and she should be responsible for paying it. The Court of Appeals found this to be an abuse of discretion, citing both Speirs and In re: Marriage of Burford, 26 P.3d 550, 560 (Colo. App. 2001) to hold all debt incurred prior to dissolution is marital debt, including student loans incurred after the spouses separated.

Can Student Loans Be Allocated Unequally?

Yes. Colorado law provides that marital debts must be allocated equitably, not necessarily equally. This means the division must be fair. But unlike most debts incurred during marriage where both spouses likely benefited in some way from the proceeds, as pointed out above an educational degree earned during marriage is not marital property.

While a spouse who earned a degree during marriage likely had a higher earning capacity which directly benefited the other spouse, that is only indirectly true in the context of a degree earned near the end of marriage or after dissolution.

A degree should enhance earning capacity, so if the spouses have children, then the family as a whole benefits from the higher earnings of the spouse who earned the degree. And that means the spouse with the degree pays more child support (if the child support obligor), or receives less support (if the child support obligee). The same is true with respect to maintenance - the spouse who earned the degree will have higher earnings, which will either (1) increase that spouse’s ability to pay maintenance, or (2) diminish that spouse’s need for maintenance from the other.

While a degree earned after divorce still confers some benefit on the other spouse, it is undeniable that the bulk of the benefit will flow to the spouse with the degree. For that reason, a court may conclude that it is equitable to allocate more of that student loan debt to the spouse who will most directly benefit.

The Speirs court, while holding that student loans incurred during marriage were marital debt, nonetheless pointed out that its holding does not preclude a court from awarding the debt to the spouse who actually incurred it. Speirs, 956 P.2d at 624. And the court upheld the trial court allocating $37,000 of the $54,000 debt solely to the Wife.

In Morton, 2016 COA 1, the court used even stronger language:

"The determination that a student loan is marital debt, however, does not foreclose a trial court from allocating responsibility for payment of the loan entirely to the party who incurred it... A court does not abuse its discretion in finding that a student loan should be solely the incurring party's responsibility because the party's degree was earned later in the marriage and will primarily benefit that party.” ¶ 9

Student Loans & Maintenance

The Colorado maintenance statute sets forth a number of factors the court is required to consider when determining a maintenance award, among them the parties’ “financial resources.” C.R.S. 14-10-114.

In the Morton case cited above, the trial court had considered the wife’s ready access to additional student loans as a financial resource that diminished her need for maintenance. The Court of Appeals reversed, holding that: “that term [financial resources] cannot reasonably be understood to include loan proceeds.” Morton, 2016 COA 1 ¶ 18.

The reasoning is simple - taking out a loan is a zero sum game: “it would be misleading to consider loan proceeds as a financial resource unless the court also considers the associated liability, in which case (and in virtually every case) the net asset value is zero.” 2016 COA 1 ¶ 23. As the court pointed out, a spouse can almost always borrow money, for instance from credit cards, and requiring a spouse to go into debt would run afoul of the rule that a spouse cannot be required to deplete his/her share of the marital estate in order to qualify for maintenance. In re: Marriage of Yates, 148 P.3d 309, 313 (Colo. App. 2006).

Do You Need a Divorce Lawyer in Colorado Springs?

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Assets & Debts