Standard Approach in Community Property States Like California
For the legal minds out there, in California, student loans in dissolution proceedings are governed by Cal. Fam. Code § section 2641. What matters in assigning any student loan, regardless of that loan’s federal, state, or private characterizations, (1) is when the loan was acquired, (2) if any community property was used to pay it back during the marriage, and (3) if the education or training substantially enhanced the party’s earning capacity. What if someone took out a student loan prior to marriage and paid it back solely from their separate property during the marriage? It is that individual’s separate property obligation, with no community property issues. Over and done. Same thing if someone took out a loan during the marriage and used separate property to start paying it off. The individual who incurred the loan is to repay it without any community property issues.
What is Community Property?
A concept vital to understanding community property division is defining what “community property” means. “Community property” means that in the eyes of the law, anything earned during the marriage, regardless of who actually earned it, is a 50/50 split to both people. When getting divorced, community property is split 50/50,. The married individuals, who were one entity in the eyes of the law, are now financially split back into two. For this article, referring to the “community” is referring to this idea that anything in the “community” is a 50/50 split. Think of it like a pool. Once funds are in the pool, they are community property. If anything spills out, one of the two parties must put the water (money) back into the pool.
Community Contributions to Education or Training
When it gets tricky, as in all things, is when the community gets involved. Specifically, we are discussing “community contributions to education or training. This means payments made with “community or quasi-community property” for the repayment of a loan “incurred for education or training,” regardless of the payments being made while the parties were residing in California or outside this state. For the purposes of this article, quasi-community property shall mean the exact same thing as community property, just that it is community property that was earned outside of CA.
Regarding student loans, the community property has a claim to be reimbursed for community contributions to education or training of the party that substantially improves the earning capacity of the party. This is important. For example, John took out $100,000 for medical school, and became a successful doctor. His spouse, Mary, waited tables and paid off that debt. John cannot just divorce Mary and leave her footing that bill.
The opposite situation is also anticipated by the law. The community reimbursement claim can be reduced and give a spouse a way out if the other spouse accrued thousands in student loan debt… and didn’t use the education or training, or otherwise earned impractical degrees. For example, Edward took out loans for $50,000 for his underwater bicycle pedaling doctorate. Julie can easily argue that Edward should reimburse her for her half share of the $50,000 paid by the community. Her share would be $25,000. This amount was used for John to learn advanced techniques and become certified in pedaling underwater. This claim applies if the community did not substantially benefit from John’s degree and training.
Specifics of CA Community Property Law
There are a few more nuances to discuss.
First, student loans cannot be split between both parties as an obligation. One party must be assigned responsibility for paying the loan.
Key Legal Presumptions in Court
Second, there are certain presumptions the Court will use. These are findings the Court will strongly favor unless there is clear evidence to the contrary. There is a rebuttable presumption if less than 10 years have passed before the divorce proceedings began. In this case, the community is presumed not to have substantially benefited from community contributions to the education or training. If 10 or more years have passed, the presumption switches. The community is then presumed to have substantially benefited from those contributions. This means 10 or more years is favorable if you want to get reimbursed for helping pay off student loans. If less than 10 years have passed, it is not impossible to get reimbursed. However, it will be harder to prove that you benefited and to receive that reimbursement.
Offsetting Student Loans Between Both Parties
Third, if both parties have student loans, the Court is more likely to find that the education or training received by each party is offset, and reimbursement is less likely.
Student Loan Reimbursement
Fourth, for student loans, reimbursement for community contributions and assignment of loans pursuant to this section is the exclusive remedy of the community or a party for student loan reimbursement.
Impact of Prenuptial and Other Agreements
Fifth and final, the last wrinkle to be addressed is the other agreements made by the parties assigning student loan debt. If the parties entered into a prenuptial agreement or other agreement concerning the student loan debt, that agreement controls. If that agreement is somehow invalidated, the Court will use the above analysis to assign the student loan.
This is the approach in community property states, specifically in California. Equitable division states take a more overarching approach to asset division, meaning the Court will weigh each party’s financial circumstances, earning capacity, ability to pay any potential debts moving forward, and fairness regarding assigning any potential student loan debts.
Understanding how student loans are treated under California common law property rules can be complex. If you have questions or need guidance navigating these issues during your divorce, don’t hesitate to reach out to Burgos Santoyo Smith or consult another family law attorney to help you develop the best legal strategy for your situation.
