Problems with student loan debt pushed Congress to create a seemingly straightforward law in the 1990s to help borrowers lower default rates by consolidating debt with their spouses.
Two decades later, divorced borrowers are struggling with the unforeseen consequences.
“This problem, in particular, is a great metaphor for how broken the student loan system is," Bonnie Latreille, director of research and advocacy at the Student Borrower Protection Center, told Yahoo Finance. "This product was so dangerous that they just stopped making it. It's been 15 years and they haven't found a way to unwind it.”
The issue stems from 1992 legislation aimed at fixing student loan default rates that did not account for the possibility of divorce or capability to separate student debt liabilities between married couples.
“It’s a nightmare," Montana resident Honor Mann, who has seen her tax refunds seized and wages garnishes while struggling with her and her ex-husband's student debt for more than a decade, told Yahoo Finance. "Nobody will help us. Nobody will separate it so we don't have to deal with each other ever again.”
ED did not respond to requests for comment by the time of publication.
In Florida, Dennis Ballard has been grappling with $250,000 in combined student loans with his ex-spouse, a process which has been stressful not just because of the high monthly payments and the unnecessary frequent interactions with his ex, but also because the loans didn’t qualify for the pandemic payment pause.
“Just on a personal level, having to constantly deal with your ex-wife, that can be kind of frustrating,” Ballard told Yahoo Finance.
In Arkansas, Paula, 61, said she has been dutifully paying on over a hundred thousand dollars in federal student loans but her hours had been cut and income reduced so she was worried sick about making $1,200 in monthly payments once the payment pause on federally-backed student loans lifts in October.
“I’m just waiting for garnishments,” Paula told Yahoo Finance.
'No remedies in the law'
The “student loan crisis” was already a big part of the education conversation in the 1990s as experts worried about college tuition rising faster than inflation and alarming default rates across the country.
In 1992, Congress also introduced a suite of consolidation programs to help borrowers with repayment. In the Higher Education Act of 1992, lawmakers created the spousal consolidation loan.
"A married couple, each of whom as eligible student loans," the text states, "may be treated as if such couple were an individual borrowing ... [and] if such couple agrees to be held jointly and severally liable for the repayment of a consolidation loan ... and without regard to any subsequent change that may occur in such couple's martial status," the text stated.
And so from January 1, 1993 to June 30, 2006, married borrowers could be jointly liable for loan repayment via the Department of Education. And even after the program ended, Representative David Price (D-NC) told Yahoo Finance, Congress "didn't fix the problem for everybody who was already stuck with it."
Price, who heard stories like these from his constituents, introduced a bill in 2019 to fix the issue.
The bipartisan bill — the Joint Consolidation Loan Separation Act — was aimed to provide divorced spouses to separate their loans, split proportionally, so that they’ll be able to pursue repayment on their own.
His team is now planning to re-introduce the bill. And based on their conversations with ED and their estimates, possibly up to 120,000 couples — or ex-couples — are holding these spousal loans.
Price noted that “for people who are in these situations where one partner is uncooperative, we have a set of circumstances [in the bill] where the paying partner, so to speak, could renegotiate the situation unilaterally."
Without any provisions that would allow couples to separate student debt despite being divorced, the situation has been a financially painful hindrance for tens of thousands of divorced student debtors ever since.
“If a borrower has a problem with their student loans, there's almost always a fix or remedy," Latreille said. "But spousal consolidation are really the only thing where there's nothing available, there are no remedies in the law."
'He does not want to pay bills. He feels entitled.'
Borrowers like Mann, Paula and Ballard, were all encouraged to consolidate their loans with their spouse to seemingly make their debt more manageable.
Mann, 41, who got married at the age of 17, took out loans to attend a bible college in Indiana for a degree in graphic design. She said she graduated in 2001 with $25,000 in debt. Her then-spouse had attended the now-defunct ITT Technical Institute in Michigan, graduating with $5,500 in student debt.
After being laid off of her first design job in late 2001, and with her ex-spouse finding an entry-level job outside of his field, they consolidated their loans. But they divorced in 2008, and she said her ex-spouse stopped paying his portion in 2011.
When she called ED recently, Mann recalled being told that “there is nothing they can do to help, it’s all federal regulations.”
Mann defaulted on her Federal Family Education Loan Program (FFELP) loans through the Pennsylvania Higher Education Assistance Agency (PHEAA) years ago, and her outstanding balance currently stands at $42,000. (The ED recently enacted some relief to defaulted FFELP loans, but Mann has not yet found out if her debt qualifies.)
“They’ve done Treasury offsets for me since the beginning,” Mann said, referring to how the federal government seizes tax refunds from debtors for delinquent debts owed to federal agencies. “And once I was able to find a full-time job… they’ve been garnishing [wages] since then.” (She noted that roughly 15% of her paycheck — around $325 — had been deducted every month until March last year.)
In Florida, Ballard, an attorney, is also grappling with his consolidated spousal loans. After both he and his then-spouse graduated from law school in 2005, they both owed $250,000 in private and federal loans. In 2008, he got a call offering to consolidate his loans with his spouse, “pay the lowest interest rate, blah, blah, blah,” he recalled being told. “They really sold the goods.”
The couple divorced in 2015, but since they still owed more $244,000 still — split 60/40 between them — they had to keep in touch regarding repayments.
If one decides to not contribute payments, collectors will go after the one with deeper pockets to recoup the debt. One promissory note signed for the spousal consolidation stated: "We understand that this means that one of us may be required to pay the entire amount due if the other is unable or refuses to pay."
For Paula in Arkansas, who took out loans to attend university and had consolidated about $25,000 in loans with her ex-husband in 2005, it was “a really bad idea in hindsight.” The debt owed has almost quadrupled.
“I've called them about doing anything, reducing the interest rate — it's 8% — or dissolving the consolidation, and they won't do anything at all,” Paula said, noting that her ex has refused to pay anything at all. “He does not want to pay bills. He feels entitled.”
She’s resigned to what happens when the debt goes into collections, adding: “I don’t know when it goes to garnishment [or] if I will be the only one garnished."
For Mann, who’s trying to buy a home, she also isn’t able to get any access to loans help since she had defaulted on her student debt. And since she had defaulted on the loan years ago, it had fallen off her credit report, so rehabilitating the loan could depress her solid credit score.
“I figured I was just screwed with this for the rest of my life,” she lamented.
Rehabilitation does carry some credit risks for borrowers in the near-term. Bradley Custer at the Center for American Progress found that when he consolidated his own commercially-held FFELP loans into federally-backed Direct Loans to benefit from the payment pause, there was a small drop in his credit score of 8 points.
“I wonder about people with who started out as much lower perhaps credit scores or have more variation in their credit history and their financial activity that a drop like this from something that should be good, could be quite damaging to their credit,” Custer said.
And unless Price’s bill passes, these borrowers don’t feel very optimistic about their financial future.
“I've been thinking about this for a long time, it's bothered me,” Paula said. “I've had depression and I've had problems just because I have no control over it — it's just crazy.”
Aarthi is a reporter for Yahoo Finance. She can be reached at firstname.lastname@example.org. Follow her on Twitter @aarthiswami.