Consolidation Loan Separation Act May Provide Relief to Victims of Domestic Violence and Abuse
Joint Consolidation Loan Separation Act Aims to Help Divorced Joint Borrowers Get Back on Their Feet.
It seemed like a good idea at the time.
Shannon DeBlieck and her then-husband used a now-defunct federal program to consolidate their separate loan amounts together into a single payment. She owed $4,000, and he owed $19,000.
The balance grew over time, until their divorce about four years ago, when it reached over $30,000. At that time, her now ex-husband was out of work, and was unwilling or unable to contribute to the payments.
But now that the loans were consolidated, both of them were jointly and severally liable for the entire debt. In other words, she didn’t just owe her $4,000 plus interest. Instead, she was legally liable for the entire balance. Once they consolidated their loans, there was no mechanism for her to separate her debt from her husband’s, even though they were divorced.
The divorce decree has no bearing on the contract that they signed as a married couple, and lenders aren’t obligated to abide by it.
She wound up paying the whole thing.
The federal government started allowing married couples to consolidate both of their federal student loan obligations into a single loan beginning in 1993.
It turned out to be a bad idea.
The Higher Education Amendments of 1992 included a provision that allowed married borrowers to combine their federal student loans into a joint consolidation loan, starting January 1, 1993. To obtain a joint consolidation loan, each spouse agreed “to be held jointly and severally liable for the repayment of a consolidation loan, without regard to the amounts of the respective loan obligations that are to be consolidated, and without regard to any subsequent change that may occur in such couple’s marital status.”
In plain language, this means that if one spouse totally flakes out on the loan for any reason, the lender can go after the other spouse for the entire balance. Even if it was the flake who originally borrowed every dime. It also means that a divorce doesn’t change that face. The spouse who didn’t borrow the money, didn’t get the degree, and who isn’t benefitting from the education the loan provided still has to repay everything the flake skips out on.
This was causing a lot of problems for people like Shannon DeBlieck. In her case, her ex-husband had trouble finding work – and went five years without filing taxes. That basically blew them both out of eligibility for income-based repayment, which is calculated based off of taxable income.
Some borrowers have an even harder time of it. For example, some victims of domestic violence or spousal financial abuse were unable to get relief following their divorces. Some exes were uncooperative, non-responsive or became impossible to contact. In some cases, collectors came after newly single mothers. Measures include garnishing wages, seizing tax returns and even Social Security benefits.
Meanwhile, late payments from uncooperative ex spouses were spilling over onto credit reports of divorcees and single parents – some of whom had reduced earning potential because they had stayed home to raise children and take care of the household. When the higher-earning partner flakes out on a spousal consolidation loan, the struggling ex gets left in the lurch.
“It’s hard to believe that the government has allowed these collection practices to continue and that a judge doesn’t have the authority to modify the promissory note for joint student loans.”
Domestic violence scenarios
If a victim of domestic violence has to flee and hide from a violent ex-spouse, there is still no mechanism for the victim to sever herself from the debt. If the abuser won’t pay, she is responsible for the whole thing – even if he flees to London to work as a high-powered lawyer and she’s stuck raising two children while waiting tables.
And she can’t get on an income-based repayment plan that would be affordable for her, because she would have to get all her ex’s financial information, and remain in contact with him – even though he could be dangerous.
Under the terms of these spousal consolidation loans, a couple could divorce as a result of domestic violence. Then the ex-husband could show up and beat up the ex-wife. He’d go to jail for it. Then he’d lose his job, and with it the income that was primarily repaying the student loan balance. Under the current law, the domestic violence victim is forced to repay the entire debt.
Total and permanent disability forgiveness
Generally, totally and permanently disabled borrowers qualify for forgiveness. Not with a spousal consolidation loan. If one former spouse becomes totally disabled, the other spouse is still liable for the entire balance.
To add insult to injury, these spousal consolidation loans generally don’t qualify for Public Service Loan Forgiveness. So there’s no ten-year escape hatch for nurses schoolteachers and blue-collar workers working for governments and charities.
And without the full and complete cooperation and full financial disclosure of the ex-spouse (fat chance!), borrowers in spousal consolidation loans can’t enroll in an income-based repayment plan (IBR).
“I worked so hard to get the loans out of default to enroll in an IBR to find out I need his nonexistent financial information to qualify. He hasn’t even filed taxes in 5 years!” writes Shannon DeBlieck, mentioned at the top of the article. “It’s hard to believe that the government has allowed these collection practices to continue and that a judge doesn’t have the authority to modify the promissory note for joint student loans.”
It seemed like a nice idea at first. But in practice, it was disastrous – and Congress banned spousal student loan consolidation in 2006.
Can’t you just refinance?
In theory, a divorcing couple could refinance the consolidated loan. But in practice it’s not so easy. First, both halves of the couple must sign onto a refinance agreement. If one half of the couple is non-responsive or uncooperative, they won’t sign the refi documents.
Even if both parties are willing, one spouse may not be able to qualify to refinance his or her portion of the debt on their own.
The Joint Consolidation Loan Separation Act
There’s a bill currently in Congress that would remedy that. The Joint Consolidation Loan Separation Act (H.R. 2728) would allow a divorcing couple to submit a joint application to separate their obligations under their joint consolidation loan. Additionally, the Joint Consolidation Loan Separation Act would also allow a single borrower to submit a separate application if they are the victim of domestic or economic abuse, or if they cannot obtain the necessary financial information from their partner.
Support in the House is bipartisan: The two original sponsors are Reps. Bradley Byrne (R-AL) and David Price (D-NC). There are no co-sponsors yet. The bill is now before the House Committee on Education and Labor.
Meanwhile, a Senate version, co-sponsored by Marco Rubio (R-FL) and John Cornyn (R-TX) has been introduced to the Senate Committee on Health, Education, Labor and Pensions.
Under the terms of the Joint Consolidation Loan Separation ActAct, separating spouses can opt to split student loan obligations proportionally to the debt each originally contributed to the consolidation loan. Furthermore, borrowers will be able to transfer eligible past payments towards income-based repayment programs or the Public Service Loan Forgiveness Program.
“When survivors escape abuse, they should be able to start over without the debts of their abusers. We applaud this bill for creating a solution for those survivors who consolidated loans either in good faith or under duress and are now rebuilding their lives,” said Monica McLaughlin, Director of Public Policy at the National Network to End Domestic Violence.
The Joint Consolidation Loan Separation Act is also picking up support from consumer and domestic violence victim advocacy organizations. Examples include:
- The National Consumer Law Center,
- Virginia Sexual and Domestic Violence Action Alliance,
- National Network to End Domestic Violence
- North Carolina Coalition Against Domestic Violence.
- Virginia Sexual and Domestic Violence Action Alliance.
- National Network to End Domestic Violence.
- National Consumer Law Center
- North Carolina Coalition Against Domestic Violence
Outlook for the Joint Consolidation Loan Separation Act
It’s early in the process, but the optics for the Joint Consolidation Loan Separation Act look good. It addresses a very reasonable problem with a sympathetic constituency. It’s likely to largely benefit women, which means politicians that sign on to support it have a talking point as they head into re-election season. The problem is that the benefit would accrue to a pretty small group of people, still struggling with student loans they took out and consolidated at least 13 years ago, before Congress banned the spousal consolidation loan.
Both the House and Senate versions of the Joint Consolidation Loan Separation Act need co-sponsor support.
And your Congressional Representatives and Senators need to hear from you.
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Jason Van Steenwyk is an experienced financial industry reporter and writer. He is a former staff reporter for Mutual Funds, and has been published in SeekingAlpha, Nasdaq.com, NerdWallet, Value Penguin, RealEstate.com, WealthManagement.com, Senior Market Advisor, Life and Health Pro and many other outlets over the past two decades. He is also an avid fiddle player and guitarist. He lives in Orlando, Florida.