Marital debt, which includes student loans taken out after saying “I do,” is often seen as a shared investment in the couple's future. This type of debt is typically considered to have been incurred for the mutual benefit of the couple and is thus subject to division upon divorce.
After you divorce, that spouse will be responsible for their student debt. In some cases, if you used community money to pay down a student loan, the spouse who didn't get the education can get reimbursed for their share of community money spent on the other spouse's education.
A parent PLUS loan, or Direct PLUS loan, is a form of federal student aid. Once a student reaches federal student loan limits, parent borrowers will often take out a PLUS loan. A parent PLUS loan is an unsubsidized federal direct loan.
How to Use the Double Consolidation Loophole: The key to using the double consolidation loophole is to consolidate each of your Parent PLUS Loans twice. In this scenario, a borrower can have as few as two Parent PLUS Loans.
Parent PLUS Loan borrowers can have their debt forgiven after 10 years of working full-time for the government, nonprofit, or other qualifying employers. For the past year, retired public servants could submit an application to get retroactive credit towards the Public Service Loan Forgiveness Program.
The $100,000 Loophole.
With a larger below-market loan, the $100,000 loophole can save you from unwanted tax results. To qualify for this loophole, all outstanding loans between you and the borrower must aggregate to $100,000 or less.
What Are Some Reasons to Avoid PLUS Loans? First, PLUS loans have no automatic grace period. Then there's the fact they aren't eligible for most IDR plans. Then, borrowing too much is easy to do, and finally, they're nearly impossible to get out of, even in bankruptcy.
Defaulting on a Parent PLUS Loan can lead to serious consequences, including wage garnishment, credit score damage, and the loss of federal benefits. But you can recover through loan rehabilitation or consolidation with the U.S. Department of Education.
If a borrower dies, their federal student loans are discharged after the required proof of death is submitted. The borrower's family is not responsible for repaying the loans. A parent PLUS loan is discharged if the parent dies or if the student on whose behalf a parent obtained the loan dies.
Nothing happens to Parent PLUS Loans in a divorce. The person who filled out the FAFSA paperwork and signed the promissory note remains responsible for repaying the debt. The lender will continue to hound the parent-borrower for payment. The divorce decree doesn't change that responsibility.
While it's possible to purchase a house during the divorce process in California, it's important to consult with your attorney to ensure you don't give the appearance of attempting to dispose of assets before equal distribution through extraordinary expenditures.
No one inherits your student loans if you die, but private lenders can seek repayment from your estate, a cosigner (for loans taken out before Nov. 20, 2018), or your spouse if you took out the debt during your marriage and you live in a community property state.
Marriage and student loans
You are not responsible for any student loan debt your spouse brings into the marriage -- unless you were a co-signer for it. So far, so good. But once you're married, if you co-sign a private loan for graduate school or a refinancing loan, you'll both be on the hook for it.
Like transferring to a child or student, an option that allows for transferring to a spouse or any other person is applying for refinancing through a private lender like SoFi, turning it into a private loan.
Neither you nor your spouse is liable for any student loan debt the other accrued before you got married unless you happened to co-sign for it; however, if one of you takes out a new loan after being married, both spouses could be.
Parent PLUS loans can potentially be forgiven after 10 years under specific conditions, such as through the Public Service Loan Forgiveness (PSLF) program after consolidation into a direct consolidation loan. Parent borrowers must enroll in the Income-Contingent Repayment (ICR) plan to qualify for PSLF.
Can the loan be transferred to the student? No, a Direct PLUS Loan made to a parent cannot be transferred to the child. You, the parent borrower, are legally responsible for repaying the loan.
Based on the information from Federal Student Aid, as of 2022, the average Parent PLUS Loan debt is $29,528. Although that might not sound like a huge amount, it depends on the parent's income.
Parent PLUS loans are educational loans, and the borrower can get an income tax deduction. When borrowers review their tax deductions, they can deduct up to $2,500 per year in interest paid on the Parent PLUS loan.
If you're a parent or graduate student seeking a Direct PLUS Loan, one of the requirements to qualify is that you must not have an adverse credit history. If your application is denied because of an adverse credit history, don't give up. You still have options.
For 2021, you can forgive up to $15,000 per borrower ($30,000 if your spouse joins in the gift) without paying gift taxes or using any of your lifetime exemption. (These amounts are the same as in 2020.) But you will still have interest income in the year of forgiveness. Forgive (don't forget).
A loan between family members, or even friends, isn't help—it's a trap for both parties. Whenever you loan money to a friend or family member, you've become their creditor. You're now a lender, and they're a borrower.
If you lend money to a relative or friend with the understanding the relative or friend may not repay it, you must consider it as a gift and not as a loan, and you may not deduct it as a bad debt.