September 18, 2009, Newsletter Issue #137: Loans With Built-In Prenup

Tip of the Week

Married students were at one time able to consolidate school loans together. This was changed as part of the Higher Education Reconciliation Act of 2005, which went into effect on July 1, 2006.

While this was seen as unfortunate by many, there was a very good reason for this provision. Once a married couple had consolidated college loans, each spouse became legally responsible for the full amount of the new loan rather than their individual portion of it.

In the event of the couple getting divorced, there was no way to separate the account into two parts again. This would give lenders headaches trying to get repaid, and would cause problems for the borrowers too.

If your ex-husband or ex-wife failed to make a payment, you would be in default and subject to adverse effects on your credit report. If a spouse were to die, the remaining one would be responsible for the entire amount too. With separate loans, a spouse's debt is forgiven in the event of their passing.

Thus, any loans taken out after July 1, 2006 are not eligible to be consolidated with a spouse. So if you are married and refinancing your student loans, choose the packages that make it affordable to make the monthly payments on both your loans.

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