With tertiary education debt becoming an increasing reality for most members of our community and with those debts being carried for many years post studies and into relationship the question as to whether and how the Federal Circuit and Family Court of Australia (“FCFCOA”) takes such debts into account is becoming an increasingly important one.
As with most issues arising upon the breakdown of a relationship and separation or divorce, there is no simple straightforward “black and white” answer.
In essence, student loans are treated differently from other debts because of their nature. Student loans are a “contingent liability” which means that their repayment only occurs once the former student commences earning an income above a threshold.
Historically, the FCFCOA has approached the student loans with no particular fixed rule in mind. Each case is considered on its own facts. If the Court concludes that the student loan is a joint liability then it forms part of the property pool and deducted from the assets prior to any division of those assets.
If the student loan is considered to be a personal liability of the former student, then it is ignored for the purposes of the balance sheet and there is no adjustment to the asset pool but may be taken into account as a potential future liability of the former student in a more indirect way or in some cases not at all. Ultimately, the Court aims to achieve a “just and equitable” outcome.
Nevertheless, consideration of the student loan is important in the first step in the Court identifying and valuing the property of the parties including their liabilities and financial resources. It is at this step that student loans either form part of the balance sheet as a liability or is excluded entirely.
The factors a Court may consider in deciding whether or not a student loan is a joint liability or an individual personal liability would include matters such as the timing of the debt:
- Was it incurred prior to the relationship or during the relationship;
- Was it a joint decision of the parties for the former student to undertake the course of education and training and incur the debt;
- Did the study result in increased income that was then applied towards the benefit of the parties and their family? In other words, was the income enjoyed jointly by the parties during the relationship;
- Has the threshold for repayment been reached and have repayments been made from joint funds or by the student’s funds alone;
- Does the other partner also have a student debt or did they have and was it paid off with joint funds;
- Does the qualification and education achieved which gave rise to the student loan give the former student an advantage financially in the future to the extent that their earning capacity will increase at a faster rate than otherwise would have been the case; and
- Is the student debt likely to remain contingent and not paid? In other words, is the former student’s income likely to remain below the threshold into the foreseeable future, for example if they are engaged in parenting or employment that derives income below the threshold.
Cases decided by the Family Court had varied outcomes depending upon their particular and specific facts and circumstances.
If the student debt was incurred during the relationship with the agreement of the parties which resulted in income being earned which was contributed towards the acquisition, conservation and improvement of property of the parties which is now available for division between them and the student is now earning income above the threshold and is repaying the debt then it is likely that the debt will be a joint liability.
In the event that the student debt was incurred solely by the student prior to the relationship with no agreement with the former partner, no income has been earned which has been contributed toward the acquisition, conservation and improvement of property and resources and the former student earns income below the threshold and is not required to repay the loan and it remains contingent then it is most likely that the student debt will be excluded from consideration and not form part of the balance sheet.
No one factor is necessary more important than the other. All of the facts and circumstances relating to the history of the parties depend on how the student loan debt arose will need to be considered carefully and ultimately the Court has an unfettered discretion as to how to deal with the debt in achieving a property settlement which is “just and equitable” as between the parties.
Pearsons Lawyers
This is general advice only. Pearsons Lawyers have a team of specialist family lawyers who can provide timely and accurate advice on all matters that need to be dealt with following a separation including parenting and property matters. To arrange your free initial consultation contact Pearsons Lawyers today on 1300 699 688 and “know where you stand”.
