<p>So mom and dad decide that they will take out PLUS to make up the gap,and in fact, mom can take out the loan as she doesn't have much on her credit record and dad has to run a business as the primary wage earner. Only one parent takes out PLUS. so in many cases, it makes sense to do this. </p>
<p>Problem is the marriage falls apart between the time the loan is taken and the loan is paid, and at nearly 8% interest, that's a staggering hit to take. Especially for someone who has not been working full time for years. </p>
<p>I bring this up, and use the mom/wife as the one shafted, since that has been my real life experience with this. Women who are working part time, or are SAHMs who take out the PLUS so that DH's credit record doesn't reflect it since he's the one on the line for business things, and then the marriage breaks up. When you take these loans totally in your name, baby, they are YOURS from what I can see in the financial settlements. And the payback can be a real killer.</p>
<p>A lot of things don’t go by the law. Living n a community property state and seeing what ends up happening here, as I see a lot of this, it doesn’t quite get split that way. Everything is negotiated and it is not a good thing to have loans just in your own name, going into these things. Also, when things go sour, but the financials are not settled, that loan is in YOUR name and affects your credit and the payments have to be made each month. Not to mention the fact that if the spouse passes away, if the loans had been evenly distributed between the two of you, half of the obligation disappears at that time, but not at all if they are in your name.</p>
<p>Many families not only assume that the financials will be a certain way when they take out these loans for their kids, but also that the marriage would be, and that does not always work out that way. Being in college mode now for 15 year, I’ve been seeing a lot of marriages break up when the nest empties. A frightening number.</p>
<p>In a community property or other state, a divorce court can order both parties to be responsible for the debt but that doesn’t change who the creditor is going to go after - the name on the contract.</p>
<p>If a court orders the husband to be responsible for the debt but he doesn’t pay, Sallie Mae will go after the wife. The wife will have a claim against the husband, but she’ll have to take the steps to collect.</p>
<p>Generally the court would not order one party to “be responsible” for the debt, but rather that one party pay out $X cash to compensate the other as part of the settlement, selling assets if necessary to come up with the money.</p>
<p>So if there is $30K outstanding on a PLUS loan, in cp’s example, the business-owning husband might be ordered to pay the loan-holding wife $15K on top of whatever amount of money was seen to be a fair percentage of the wife’s stake in the husband’s business. Or, alternatively, the monthly payment amount might be considered in setting the amount of monthly alimony. </p>
<p>That is nice in theory, calmom, but in reality the family often doesn’t HAVE the $15k at the time of divorce for one spouse to pay the other. I usually see courts trying to assign the debt obligation and the asset it goes with to the same party (mortgage and house, loan and car) but often the creditor doesn’t care and will go after the party it is easier to collect from. If Visa is owed $20k, Visa is going to sue the party with the W-2 job, because it is easier to collect from that person. In this case, the loan holder is going to go after the wife, because that’s who they can sue (her loan). The court can’t reassign the debt to the husband. The court can make it the husband’s responsibility and the wife can sue the husband for the $15k, but the lender doesn’t care about that.</p>
<p>If the family had $30k as a liquid asset, do you think the wife would have borrowed it as a PLUS loan? Even after a divorce and the selling of some assets, there just isn’t $15k sitting around for one spouse to pay the other or even to ‘give’ to the other side as an asset. Lenders want cash, not tangible assets.</p>
<p>The point is that there is a difference between the lender and the parties to a divorce. If the court determines that the debt is a shared obligation, then the court may order increased alimony to compensate – or may direct the sale of an asset (like a family home) - and pay the person carrying the debt a larger portion of the proceeds to compensate for the debt. Or, perhaps the family home isn’t sold, but the divorce settlement allows one spouse to have the shared home, with the shared debt obligation being part of the reason that ownership of the family asset is being transferred to one spouse. </p>
<p>I’m not saying that the examples you and cp cite never happen – I’m saying that it is bad information and extremely bad legal advice to post as if it always or inevitably happen. Someone who is in that situation and is contemplating or in the process of divorce might come along and read that and take that to mean that they have no rights. </p>
<p>And it is a huge mistake for anyone to confuse the issue of the financial relationship of debtors to lender with the relationship of the ex-spouses. If, for example, W. has monthly loan payments of $300 and H. is paying W. $800 a month in alimony – and the amount the loan debt was considered in determining the alimony – then it is H’s obligation to pay W. that $800, and it remains W’s obligation to pay the lender $300 out of the money she is getting from H. If H. falls behind in the obligation to W., then the W. will need to go to court to enforce the obligation – but the divorce decree gives her the power to do that. It doesn’t matter if it is a PLUS loan or a credit card bill or the rent on the house that W. lives in – divorce never changes the relationship of the lenders to debtors, but it does specify the respective obligations of the spouses toward one another. </p>
<p>I understand that, but the reality is that the court can rarely make it right because there just isn’t any money after the divorce. If they couple had assets like a large 401k or equity in their home, it would be unlikely that they’d have borrowed so much as a PLUS loan. They would have taken a HELOC, a 401k loan, sold an asset, etc. They borrowed a large amount.</p>
<p>Also in your example, the alimony is taxable to the ex-wife, so the debts and assets distribution gets complicated. And taking the ex back to court gets complicated and very expensive. It take a long time, and by then the lender has already taken action against the default.</p>
<p>I think the warning in the original post is a good one.</p>
<p>When parents divorce, they need to take some time and include college planning in the process. This would include repayment of already taken loans…or payment for future college expenses. This should be part of the divorce settlement.</p>
<p>The warning is unfortunately not very useful in practical life because very few people think they are going to be getting a divorce when they are working on paying their kids college and the marriage seems just fine at the time. There is also the assumption that it’s all going to work out fairly, especially in community property states. Doesn’t always work that way. Divorce settlement can drag on and the loans have to be paid in the meantime and if they are just in one person’s name…well. Also, it seems to me that college payments are often not specific when it comes to divorce, something I don’t really understand, but see time and again. I’ve had friends with what are considered top divorce attorneys that did not get the settlements spelled out for college payments. We see it on this board too–the NCP refusing to even release fin info for PROFILE and forget about getting any payments for college. </p>
<p>Our state divorce laws allow for each parent to be responsible for half of the cost of an instate public university only. I suppose parents could negotiate higher amounts…but that is the state divorce guideline. </p>
<p>So…if the child goes to Yale, the parent cannot be required to pay half the cost of attending Yale. </p>
<p>Regardless…in a divorce settlement, the debts ALL need to be considered, and that includes college loans.</p>
<p>The point, as I understand it, of the original post is that the parent who actually has the income to pay back the PLUS should be the one taking it. And if the PLUS would mess up that parent’s other financials, well then the family should reconsider the college list, and find out if it is possible to get the kiddo(s) educated without PLUS loans.</p>
<p>Bad things happen. There are ugly surprises. If the family makes the college list with the understanding that no one will take out a PLUS, chances are better that any bad, ugly, or other not so good financial turns can be weathered without quite so much damage.</p>
<p>The problem with the parent who actually has the income to pay it back taking the PLUS is that it could be far beneficial for the other parent to take it, when one takes the family as a unit. In our case, it was better that I took it, though my husband’s income is more of what repaid it. </p>
<p>WHen you take out loans that are so long term, one has to remember that things can happen before pay off that make it a tough row. To start paying the loan right away does mitigate some of that. Taking large PLUS amounts and then deferring the payments while they rack up 7% interest and starting the repayment six months after the students graduation on the 25 year plan makes for a huge amount. It’s bad enough the way we did it, I assure you. 7% is no bargain. Doubles in about 6 years, does it? Close to that anyways. Unless you are planning on dying soon, it’s a long sentence. Worst than a lot of mortgages and with them you can at least get rid of the house and the obligation. Not much you can do with a school loan.</p>