Are Agreements To Make Your Children Take Out Student Loans To Pay For College Enforceable?

by Fox Rothschild LLP
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It is not unusual for parties to address their children’s college education in their Marital Settlement Agreements.  If children are college age or close, parties may actually specifically determine the percentages that they will pay for college costs (including pre-college costs such as SAT/ACT preparation, application fees, etc.)  If the children are younger, parties often acknowledge their responsibilities and define the types of things will be covered, but defer the determination of their actual percentage shares until the children are in their senior year of high school.  Very often, the agreement will provide that the children are required to apply for all available financial aid, grants and loans.  Since student loans may be easy to obtain to fund the vast majority of college, at times, parties may limit the loans that they are going to force their children to take to subsidized student loans (e.g. Stafford, Perkins) which are limited vs. private loans where they could borrow vast sums.  But if college is a part of support of children in New Jersey, at least children of divorced parents or never married parents (vs. children of intact families that don’t seem to have the same rights), can they be forced to take loans to pay for an obligation that is supposed to be their parents’ obligation?

The issue of student loans was one of the issues addressed in the unreported (non-precedential) Appellate Division opinion in the case of M.F.W. v. G.O. decided today.  In this case, the parties divorced in 2003 when their daughter was 5 years old.  Their settlement included an agreement to pay for college and also had the typical language requiring that the child, “… “shall apply for all loans, grants, aid and scholarships available to her, the proceeds of which shall be first applied to college costs.”  When it became time for the child to go to college, in this case Georgetown, at a cost of more than $66,000 per year, the mother sought the father’s contribution for both college and pre-college costs.  When the issue wasn’t resolved, an enforcement motion was filed.  One of the father’s defenses was that the daughter should have been required to obtain loans.  It should be noted that the father’s net yearly income increased from approximately $80,000 per year at the time of the divorce to approximately $217,000 at the time of the motion.

The trial judge rejected the father’s request to enforce the agreement and require the daughter to seek student loans, finding it to be “repugnant.”  As noted by the Appellate Division:

The court found it was “unfair and unjust” to require Jane to apply for “all loans, grants, aid and scholarships available to her” and to apply them first to the college costs because Jane “should not be bound to a contract which she is not a party to” and because the parents “have a legal obligation to support” her “and cannot compromise that obligation even if they both agree.” The court found this provision of the PSA is “repugnant and will not be enforced.”

That is an interesting holding because I have seen these clauses enforced all of the time.  Seemingly, this is because the court found that “the parties have the financial wherewithal to meet all of their daughter’s financial needs for college.”  But many times I have seen this provision in agreements where the parties seemingly have the financial wherewithal though sometimes I shake my head because unless parties have saved substantially for college, most people can’t afford to pay for college out of income, even at the income levels in this case.  Moreover, some people of means include these clauses because one or both believes that the children need to have “skin in the game”, or because their parents didn’t pay for their education, or for any other reason.  As noted above, if parents of means in an intact family make their child take out loans for college, that is their prerogative and the children probably have no recourse.

Back to M.F.W., the father appealed arguing, among other things not germane to this post, that the trial court should have enforced the parties’ agreement regarding loans and the Appellate Division affirmed the decision.  With regard to the student loan issue, the Appellate Division noted that agreements are usually enforced and should not be disturbed, unless there is a change of circumstances.  You get the sense that the court was inferring that this is what the trial judge meant in his decision, assuming it was not specifically stated as such.  The change of circumstances was the parties increased income.  Accordingly, they held that

The court found “unfair and unjust” the provision that required Jane to apply for loans and financial aid because it was the parents’ obligation to pay for college and they had the ability to do so. Defendant acknowledged that “[t]he parties both have significant financial resources and can afford to send their daughter to Georgetown University.”  The court did not err by not enforcing this provision.

We cannot say, given the parties’ incomes, that the court erred by not requiring Jane to obtain loans or other financial aid where she would be financially obligated to repay the funds in the future. Her parents had agreed to pay for her college expenses under the PSA. This would include any loans to pay those expenses.

There appears to be a contradiction here.  Was the loan requirement eviscerated because of the parties’ increased income or because the parties agreed to pay for college and that this would include loans?  The latter suggests that it was intended that the agreement to pay for college included the agreement to pay for the loans that the child was going to be required to pay.  That certainly is not the standard practice.  Moreover, if the court is interpreting the agreement in that way, then there would not be a change of circumstances because they are interpreting the agreement to pay for college to also be an agreement to pay loans too.

Left unsettled by this case is (1) whether you can make your kids take out loans and if so (2) whether that agreement means that you have to pay for the loans your children take out if you agree to pay for college.   If nothing else, though not precedential, this case provides ammunition to parents seeking to compel the other parent to pay for college, whether or not their Agreement requires that the children take out loans.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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