The community property states where student loans are community property are as follows: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin and the District of Columbia.
Student loan debt is now the second largest debt category in the United States behind home mortgages. The average student loan debt load is $28,400 but for those who graduate from a four-year college with a sizable debt, the average is a whopping $88,400. While student loan debt is not as bad as credit card debt, the effect on the average individual is much the same. Student loan debt can have a large effect on one’s ability to buy a house, to save for retirement and, for some, a devastating effect on their credit scores.
Student loan debt is a problem that affects almost everyone these days, and it’s not going away any time soon. In fact, student loan debt has only increased by $1.4 billion in the past year. If you’re like many people out there, student loans have you feeling like they have you in their grip. Fortunately, you are not alone in the fight against student loans. Depending on your state, student loans can be separated into two categories: community property and non-community property.. Read more about list of community property states 2021 and let us know what you think.States of common ownership are states where both spouses own equally all income, property and debts acquired during the marriage.
In states where there is a community of property, the couple’s property and assets are divided equally in the event of divorce. However, joint possession legislation may also affect Americans during their marriage. This is particularly the case if one or both spouses have student loans.
In this guide, we look at what community of property is and how living in community can affect your taxes and student loan repayment plan.
Here’s what you need to know.
Community states are a minority in the United States. Most states adhere to the common law system of property rights and are often called states of equitable distribution. In these states, the judge decides on a case-by-case basis how the property should be divided if the couple cannot agree.
There are currently nine states with community of property. These include:
- California (rules generally apply to domestic partners as well).
- Nevada (rules generally apply to domestic partners as well.
- New Mexico
- Washington, DC. (The rules generally also apply to cohabitants)
In Alaska, South Dakota and Tennessee, couples can choose a system of joint ownership or common law.
Only income you receive during the marriage while living in a state with joint assets counts as joint income. The same general rule applies to joint assets and the debts of the spouses accrued during the marriage (credit card debts, mortgages, car loans, etc.).
It is important to note that both criteria must be met simultaneously for the rules on joint ownership to apply. Consider the following two examples:
- You bought your home when you lived in a community property state, but before you married your spouse.
- You bought your home when you were married, but before you moved to the state where the property is jointly owned.
In both of the above examples, your home would not be subject to community property law.
However, if the house was purchased when you were married and living in a community property state, you and your spouse have equal property rights.
There are exceptions to the above rules. For example, gifts or inheritances received by each spouse separately are considered separate assets and not included in the joint assets.
To learn more about what is considered common property and what is considered separate property, read the IRS’ complete guide to common property. You can also ask a local family law attorney or property division attorney to explain the rules in your state.
If you own property in more than one state, the IRS applies the rules of the state where you live. The IRS takes several factors into account, including where you pay income tax, where you vote, and how long you’ve lived in the state, to decide what state rules apply.
Suppose you own property in Arizona (a community property state) and Florida (a common law state). Let’s say you both purchased property after marriage and live primarily in Arizona.
If so, how will the probate courts handle your Florida assets during the divorce? According to the IRS, it all depends on where you live – or where you permanently reside. All income and assets you accumulated while married and living together in the state are subject to community property law.
So in the example above, Florida assets would be divided 50/50 in the event of a divorce. It would be subject to Arizona general property law. Despite the fact that Florida is not a community property state.
Joint property laws have the most impact on your taxes if you choose to live separately as spouses.
In most states, each spouse reports his or her income separately on his or her tax return. So if you earn $100,000 and your spouse earns $50,000, you would only report $100,000 in income.
But in states with joint assets, you must equalize your income even if you file separately. To do this, take the total amount you both earned and divide it by half.
In the example above, each of you would report $75,000 of income on your tax return ($150,000 divided by 2 = $75,000).
This significant difference may mean that a joint application is a better option for some couples. This is especially true if you pay off your student loans through an income-driven repayment plan (IDR).
Let’s see why.
Ask me about your student loans
In some circumstances, living in a community property state can have a significant impact on your monthly student loan repayments and any debt forgiveness you may have.
Let’s say Jenny is a doctor, makes $200,000 a year, and has $300,000 in student loans (all federal student loans).
We will also say that Jenny works at a state hospital and wants to use the Public Service Loan Facility (PSLF). Finally, imagine Jenny’s husband, Paul, works as a teacher and makes $50,000 a year.
In most cases, it is not very advantageous for Jenny to choose either married or divorced status.
First, it will lose a large number of deductions and credits. In other words, their RDI payments would not drop as much because they would still be based on their $200,000 income.
But if Jenny lived in a community state, that might change the whole equation.
In this case, her income would drop to $125,000 if she filed separately. And that can make a big difference. Both in its monthly IDR payment and in the amount of PSLF rebate it can eventually receive.
Related: Tax consequences of the PSLF for couples married in community of property states
It is important to note that the tax trick described above does not work for everyone.
First: To use this strategy, you must be a member of an income restricted repayment plan (IBR), income restricted repayment plan (ICR) or a pay-as-you-go (PAYE) scheme. Under the revised apportionment system (REPAYE), your monthly payments are always based on the combined income of you and your spouse, whether you file jointly or separately.
Second: If you are a lower-earning spouse, increase your declared income by filing separately in a jointly owned state.
And since your IDR payments are based on your income, separation will increase your student loan payments.
As noted above, all debts incurred by either spouse in a state of community of property are considered joint debts. This can be a real headache for couples who are divorcing or legally separated.
For example, let’s say your ex-spouse took out $200,000 in student loans while married to you and living in a community of property. After the divorce or separation, you owe half of that debt ($100,000). This is despite the fact that none of the loans were in your name.
Again, this only applies if your spouse’s debts arose during your marriage. All student loans taken out before marriage (or before moving to a jointly owned state) are the sole responsibility of the borrower after divorce.
Some couples choose to draw up prenuptial agreements before marriage to avoid such problems. A prenuptial agreement is an agreement in which is recorded how the marital property shall be divided in case of divorce. When a married couple enters into prenuptial agreements to separate their student debts, this takes precedence over state laws regarding joint property.
If you live in a community of property and are wondering which status is best, you can use the Student Loan Planner® calculator to help you decide.
In the calculator you can choose whether or not you live in community of property. They will then tell you which installment plan will save you the most money.
Or, if you want to talk to someone who really understands student loans, sign up for a meeting with a Student Loan Planner® advisor.
Each of our advisors is a certified CPA, CFP or CSLP. They can help you navigate your way through the complexities of student loan repayment for married couples in community property states.
Frequently Asked Questions
Is a student loan considered community property?
No. A student loan is not considered community property.
What are the 10 community property states?
Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington.
What are the 9 community property states?
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.