In August President Joe Biden announced a new plan for federal student loan forgiveness. Individuals are eligible for federal student loan forgiveness if their individual income is less than $125,000 or $250,000 for households. Under this plan, individuals that qualified for Pell Grant at any time during college will be eligible for up to $20,000 in debt forgiveness. Those that never received a Pell Grant are eligible for $10,000 in debt forgiveness.
What does this mean for divorce and property settlement? In Nebraska, student loans are often considered nonmarital and are awarded to the party that incurred the debt. However, student loans may be considered marital debt if a party can establish that they were used to support their family or for their family’s benefit rather than for educational expenses alone. If the court determines that the loans are marital, President Biden’s prospective student loan forgiveness may be problematic if the loans are ordered to be the responsibility of one party as a part of an equitable division of the estate. Essentially, forgiveness of those loans down the road could result in one party walking away with more of the marital estate than originally intended.
Other states have treated debt forgiveness as a gift. For example, New York has previously determined debt forgiveness to be a gift to both parties, and therefore marital property. Other states have considered debt forgiveness to be a gift to one party, and therefore not subject to division. When Nebraska courts consider property acquired through gift or inheritance, the property is ordinarily set off to the individual receiving the gift or inheritance rather than both spouses. However, if both parties contributed to the improvement of the property which was received by gift or inheritance, it follows that the forgiveness of the loan should be considered a gift to both parties.
Nebraska courts have previously held that there is a difficulty with valuing prospective benefits in property settlements. Eligibility for a benefit does not guarantee that benefit, which creates a problem if the parties are attempting to equitably divide a benefit that may never be recognized. In the case of student loans and potential forgiveness, it may be more beneficial to classify these loans and any future forgiveness as nonmarital. The loans will then be set off to the party that incurred them. This eliminates the problem of either party walking away with a windfall in the event those same student loans are later forgiven.