The report was published by National Public Radio on February 8, 2022. We all know about student debt for college and graduate programs. In 1987 student debt totaled $187 billion. Today, it is $1.41 trillion, having doubled in the last 10 years. That number is staggering but when you look at it per capita, the average student owes roughly $28,000. That’s a more manageable number but in the divorce community, it is not uncommon to encounter graduating lawyers, doctors and veterinarians whose sheepskin comes wrapped in $200-300,000 in student debt.
Before the reader unfolds the crying towel, the fact is that these are still high paying professions. But we have seen parents co-signing for $50-100,000 in student debt for an occupation where the debt is 2-3x the maximum salary reasonably attainable. In a word, there is a LOT of student debt out there ranging from insignificant to catastrophic.
The NPR news piece revealed another aspect of the problem. We all want to think that those who are lending to students are doing so with some sense of altruism. A better educated America is a better America for all, right? Well, that’s just silly. Your mortgage lender doesn’t loan you money to buy a house because the lender believes in better housing for America. And, you don’t buy stock in your local cable company stock because you believe your neighbors should have cable.
So, folks with money to lend, do it for the best return and the best security. A student comes your door and asks to borrow $50,000 over four years to secure a bachelors degree in physical therapy. The person at your door has no job, no assets and, for the moment, no degree to become a licensed therapist. That’s a risky investment. Today we are told that the average student is borrowing at 3.73%. That’s about the same rate borrowers are paying on 30 year mortgage loans. The big difference is that with a mortgage you typically have two borrowers and a secured interest in a house that can be sold to pay the debt should the borrowers default. What NPR reported is that many student debt lenders approached married couples offering them a better rate if the borrowers consolidated their individual loans into a single loan which both borrowers would sign. You and your spouse each owed $100,000 and you were each paying 5.5%. The lender approaches you and says “Hey, let’s make it one debt which you will both sign and we will refinance it at 4.5%.” The people interviewed by National Public Radio said they jumped at the chance. On its face the offer is a 18% discount.
True enough. Alas, the 18% discount comes at a price. The security the lender is getting just doubled. Before, there were two individual loans for $100,000 with one borrow each at 5.5%. Now a single loan with two “guarantors” at 4.5%. Why?
Here is rub. In July 2020, the Milken Institute published a study based on December 2019
(pre pandemic) economic data. One in nine American men between 25 and 54 was not working. That’s 11% unemployment among adult men in the prime of their lives at a time when the national unemployment rate was reported at 3.5%. Thus, adult American males had three times the unemployment rate of the rest of the labor force a month before anyone thought we might face a global pandemic.
If I am the lender and I loaned $100,000 to the 21 year old adult male, I made a risky loan. But, if he married and refinanced with his wife to get the lower rate, I can now go after his wife for all of the debt (his & hers). But suppose they divorce? It doesn’t matter. Suppose the court decides that husband is a reprobate and orders him to pay his debt and indemnify wife from any part of the money he borrowed before the couple married. Again, it doesn’t matter. During the marriage they decided to make the debt joint and so far as the lender is concerned, the court has no right to unbundle the two loans the couple agreed to consolidate at the lower rate.
The NPR interview featured women who made these deals, had children, and were abandoned by their husbands after the consolidated loan was issued. They were stuck with husbands not working, not paying support, and not paying their student loans. They were being dunned by collection agencies to pay on debts predating their marriage. At least the debt pre-dated the marriage until they were refinanced during marriage to get that lower rate. Now it’s a marital debt. A court can try to pull the debt apart and assign the debt to each of former spouses individually. But the couple signed a contract and Article I, Section 10 of the U.S. Constitution says that state laws cannot impair contracts. So, a court can order one party to pay all the debt. But that does not prevent the lender from ignoring that order and going after whomever, they wish.
The lesson here is not new. Know what debt your intended spouse has. Understand whether and how it is being paid. Think twice before you join a debt (as here), add a debt during marriage or use non marital assets (gifted or pre marital) to retire debt. Stay clear of any debt where only one of you can practically use the purchased item (e.g. a car loan, education). Debt today can be relatively cheap, but the Federal Reserve is promising to change that. A ten year treasury note yields less than 2%. Your Amazon card charges 6x that amount. We have a broad range of lending sources with wildly different interest rates. Don’t allow love and marriage to conquer common sense when it comes to what you borrow and from whom.