How to Handle Student Loan Debt

Rising higher education costs combined with unemployment has led to student loan debt becoming a more common issue in North Carolina divorce and equitable distribution cases. There is no specific statute in North Carolina with which courts can rely upon for equitable distribution of student loan debts, but North Carolina courts have classified student loan debt as marital where a party proves the joint benefit to both spouses.

A little background on the student loan process will help the reader better understand the issues. Typically, the student loan payment is sent directly from the lender to the school to pay for tuition and fees. After the school credits the money towards tuition and fees, the student generally receives a refund to pay for room and board, books and supplies, and personal expenses.

Compelling arguments exist in favor of classifying some student loan debt as marital. Both parties can benefit from extra refund money used during the marriage to pay for necessary living expenses. In this instance, a court will probably consider the debt to be marital. Furthermore, while it is true only one spouse receives the education, the other spouse can benefit from the increased earning potential and/or subsequent increased income received after school. Finally, both parties can benefit from a tax credit and/or deduction for money spent on tuition and books.

Several valid counter-arguments make student loan debt a problematic issue. In North Carolina debt taken out before the marriage is likely separate. It is possible for a party to argue that they received no benefit from the portion of the student loan used to pay tuition, even if the tuition is paid during the marriage, because the parties divorced prior to the completion of the program of study. Moreover, the parties will not benefit equally in that the benefit will only be received after the parties’ divorce.

Why do North Carolina courts not adopt the reasoning of awarding the same party with an automobile and its related debt to the distribution of a student loan debt? One answer is an automobile is a distinguishable asset from a certification/degree. A court does not have the power to award either party with the certification/degree. However, parties often argue this problem should be resolved under the law that classifies a professional license as separate property. In North Carolina a professional license is considered separate property under N.C. Gen. Stat. § 50‑20(b)(2). This argument is again able to be distinguished because the professional license is an asset, whereas the student loan debt is not.  

North Carolina courts have not adopted a specific test to resolve the issue of student loan debt, and therefore it is largely a factually specific determination. In North Carolina, a party should produce evidence of a joint benefit for their student loan debt to be considered marital. For example, student loan debt incurred to pay living expenses during the marriage is likely marital. Courts in other states frame the issue as whether the student loan debt provided a joint benefit or substantially benefitted both parties. See In re Marriage of Speirs, 956 P.2d 622 (Colo. Ct. App. 1997); McConathy v. McConathy, 632 So. 2d 1200 (La. Ct. App. 1994); Hicks v. Hicks, 969 S.W.2d 840 (Mo. Ct. App. 1998); Forristall v. Forristall, 831 P.2d 1017 (Okla. Ct. App. 1992).

In North Carolina, the legislature provided a list of factors to be used for equitable distribution determinations in N.C. Gen. Stat. § 50‑20(c) that provides in relevant part: 

If the court determines that an equal division is not equitable, the court shall divide the marital property and divisible property equitably. The court shall consider all of the following factors under this subsection:

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(7) Any direct or indirect contribution made by one spouse to help educate or develop the career potential of the other spouse.

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(12) Any other factor which the court finds to be just and proper.

Assuming at least a portion of the student loan debt is marital, a North Carolina court must likely answer several questions in order to distribute the student loan debt. These questions include but are not limited to the following:

1. The student loan amount received during the marriage; and/or
2. The timing of the decision to attend school, specifically whether it was before or after the parties decided to separate; and/or
3. Whether the student is eligible for student loan forgiveness; and/or
4. Whether the student graduated or completed the program of study, and if not, whether their failure was caused by bad faith.

The above is not an exclusive list, but parties can use it as a starting point on how and what to prepare for their equitable distribution case.

There is no guarantee a North Carolina court will classify as marital a debt resulting from a student loan taken out during the marriage, but North Carolina courts have done so because money spent on living expenses directly benefitted the marriage. If you intend on claiming student loan debt is marital, in preparation for the equitable distribution determination in North Carolina, gather all records of tuition payments, refund checks, statements from lenders, tax returns, and proof of graduation. These documents will assist your attorney and the court to determine how much was spent during the time in which the spouse(s) attended school, and to determine the extent to which the student loan jointly benefited the parties.