Do you – or have you – ever had a student loan? Has your ex? If your answer is yes, you should talk to your relationship property lawyer about it. We explain why below.
Do you – or have you – ever had a student loan? Has your ex? If your answer is yes, you should talk to your relationship property lawyer about it. We explain why below.
Under New Zealand’s Property (Relationships) Act 1976, relationship property is typically split equally after a separation. However, student loans don’t follow the same rules as other (shared) debts.
But first – what are the usual rules around shared debts?
Shared debts (referred to by lawyers as relationship debts) are usually divided equally, just like relationship property is. Shared debts are things like your mortgage, your credit card, hire purchase, car finance etc. It is defined in section 20 of the Property (Relationships) Act 1976 as a debt incurred:.
- jointly; or
- in the course of a common enterprise carried out by the couple (with or without another person); or
- to acquire, improve or maintain relationship property; or
- for the benefit of the couple in managing the affairs of the household; or
- for the purpose of bringing up any child (provided the child lives with the couple – the child does not need to be a child of the relationship).
If something isn’t a relationship debt, what is it?
If a debt isn’t a relationship debt (as defined by the legislation) it is considered a separate debt. Liability for separate debts is not shared and stays with the partner who legally owns the debt.
Classic examples of separate debts are student loans (course fees or pre-existing) or debts secured over separate property (such as a mortgage over an investment property that is also a separate asset).
How are the student loan rules different
If someone entered a relationship with a student loan and repaid all or part of it during the relationship using their income (or other relationship funds) – that student loan would be considered a personal debt. Repayments made may be able to be “clawed back” under legislation.
If someone obtained a student loan during the relationship, usually it will be a personal debt, but sometimes some or all of it may be considered relationship debt – especially if:
(a) It has funded a couples dreams – i.e. in Jayachandran v Daswani [2015] NZFC 5238 where it enabled both people to come to New Zealand to live, study and work in New Zealand; or
(b) The “living costs” portion of the loan was used to fund the family living expenses.
How Student Loans Are Divided in Practice
Unfortunately, the rules on student loans and relationship property aren’t always well understood. We find that where one person is wanting to “claw back” contributions made during the relationship – currently this creates more tension – unless both parties are well advised of legal entitlements (and even then, this can be a difficult topic).
To illustrate this, we discuss a few cases that have ended up in Court over student loan entitlement/lack of entitlement.
Case Study: Tiffany Reed v Vernon Shaws
Loan before relationship, repaid during relationship
Tiffany obtained her student loan of almost $50,000 just before her relationship with Vernon. Her loan was repaid in full during the relationship. In 2016, they went to the Family Court (Shaws v Reed) to decide if Tiffany had to compensate Vernon for this.
Tiffany argued that her student debt should be a joint debt, as she used her qualifications to earn a high wage – which was then used by the parties to acquire relationship property. She also claimed that it should be a shared debt because she and Vernon had pooled their finances and decided to repay her student loan before they had a baby. Tiffany argued that, had she known Vernon would want to claw back repayments, she would have structured her finances differently.
The Court rejected Tiffany’s arguments. The Court found it was required under s 20E to give Vernon an adjustment for Tiffany’s debt being repaid.
But Vernon didn’t win either. While he wanted the Court to order repayment dollar for dollar, Tiffany ended up only having to repay $10,000 (not almost $25,000 as Vernon sought).
What do we learn from Tiffany and Vernon?
· It is now reasonably settled (at least by the lower courts) that student debt incurred prior to the relationship is considered personal debt.
· If an application is made under the Act for compensation for repayment of a personal debt is made, the Court must make an order for compensation
· However the Court does not need to order dollar for dollar repayment, and will likely consider the parties circumstances when setting the amount.
Future Changes
In 2019, the Law Commission has recommended that relationship debts is redefined to include debts incurred for a couples common use or common benefit (which will match how relationship property is defined). If this recommendation is accepted by the Government, it may open the door for more student loans to be considered relationship debts by the Court.
Practical Tips for Couples
If one or both of you have a student loan, or are considering getting a student loan, we recommend the following practical tips:
– Discuss Financial Expectations Early: Print off this article and talk about it with your partner. Have open and regular conversations about how student loans are treated and how shared finances are handled.
– Keep documents: If the plan is for one person to go back to study to increase the earning potential of the family, keep records. Keep records of contributions – financial and “all of the other stuff”. This documentation can be valuable if the relationship ends and contributions need to be recognized.
– Get a Relationship Property Agreement: Any agreement you and your partner make about student loans (or any other property) is not binding unless you get a relationship property agreement through lawyers. Consider it an insurance policy against a $250,000+ Family Court fight.
Disclaimer: Yes, Clean Break is a law firm, but we are not your lawyers and this article does not create a lawyer-client relationship. Clean Break is only qualified to give New Zealand advice. This article is general legal information and should not be seen as legal advice as everyone’s circumstances are different. You should talk to a lawyer before you rely on this information.
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