Marriage! Such an amazing and beautiful thing. The LAST thing you were thinking about when someone got down on a knee was: "Hmm.. How will this affect my student loan debt situation?" BUT now here you are, and that annual income re-certification reminder comes through with the "Marital Status Information" section, and panic starts to set in:
"Will my payments double??"
"Do I need to file Married-Filing-Separate?"
"Will this throw me off course for achieving forgiveness?"
In this blog post I will focus more on when to consider Married-Filing-Separate and what to expect when ONE spouse has federal student loan debt. For more information on how to look at things when BOTH spouses have federal loans and plan to file jointly, check out my last blog here: https://www.financialcoachmeagan.com/single-post/2019/05/28/Married-With-Student-Loans-The-Impact-of-Your-Most-Efficient-Repayment-Plan-Combination
A few "triggers" to look for to help you decide if you should look into filing separate would be:
You are on an income-driven repayment plan AND:
Your spouse who does NOT have student loans makes about the same, or more money than you annually.
You are on track for PSLF or private-sector forgiveness and your timeline may be thrown off by a higher required monthly payment.
You both plan to keep your finances separate for the foreseeable future.
You (and your spouse) cannot afford a higher monthly payment.
If any of the above are applicable to you, the next step would be to identify what repayment plan you are currently on and what you are eligible for.
You have a partial financial hardship when the annual amount due (calculated using the standard repayment plan with a 10-year repayment period) on all of your eligible loans exceeds what you would pay under PAYE or IBR. The annual amount due is calculated based on the greater of (1) the total amount owed on eligible loans at the time those loans initially entered repayment, or (2) the total amount owed on eligible loans at the time you initially request the PAYE or IBR plan.
Now that you know what plan you are on and what plans you are eligible for, it's time to "stress test" what your payment would look like both ways. If you are on REPAYE, the payment calculation is based off of Joint income REGARDLESS of how you file. Keep this in mind.
Below is how each plan calculates your monthly payment:
You can also easily run these numbers on this repayment estimator: add in your AGI (Adjusted Gross Income) from your most recent tax return or your estimates, and change your marital status to reflect impacts on your monthly payment: https://studentloans.gov/myDirectLoan/repaymentEstimator.action#
Your AGI can be found on the 2nd page of your most recently filed tax return (line 7 on your 1040). Add your new spouses AGI from the last tax year to yours to get an idea of what your Married-Filing-Joint AGI may look like.
NOW, there is a crossover point you are looking for: Is how much you save annually on your student loan payments GREATER THAN the negative tax difference you can expect when filing Married-Filing-Separate?
To answer this question you will have run your taxes (or ask your CPA to do it) both ways to see the monetary difference. Here are a few things you could be giving up if filing Separate:
The student loan interest deduction of $2,500 (may not be applicable anyways if you make $140k - $170k as a married couple)
More advantageous tax brackets
The child care tax credit
The earned income tax credit
With that said, there can still be circumstances where it makes sense to file separate because you exceed that crossover point.
Lets take a recent case as an example:
Loan & Repayment Plan FACTS:
Recently consolidated into a Direct Consolidation loan, means eligible for all IDR plans
DID have loans prior to 10/1/2007, which means IN-eligible for PAYE
Loan interest rate: 7.25%
Current Balance: $285,718
Current Plan: IBR, 15% of JOINT discretionary income if Married-Filing-Joint
Spouse 1 Adjusted Gross Income: $53,720
Spouse 2 (No student loans) Adjusted Gross Income: $100,000
This client came to me prior to filing their 2018 taxes because they were concerned about a significant payment increase for the loans since they were married recently. Previously, their payment had been deferred. They also wanted to make sure they had the right repayment plan for their financial situation together as a couple.
A few things I was able to determine:
This client had other higher interest debt in the mix to prioritize paying off ASAP - available cash flow is important here
Spouse 2 (with no student debt) makes a higher income than Spouse 1
Married-Filing-Joint would significantly increase Spouse 1's student loan payment to about 35% of their take-home pay
Based on Spouse 1's income trajectory and their balance-to-income ratio, private sector forgiveness is inevitably the most cost-efficient strategy here for their plan - So this means making the minimum income-based* payments towards the balance for the maximum repayment term* to maximize forgiveness, while also saving for the tax liability* at the end of that term.
*Income-based payments: 10%, 15% or 20% of discretionary income depending on your plan
*Maximum repayment term: 10, 20, or 25 years depending on your plan
*Tax liability: paying income tax on the forgiven balance in the year it is forgiven
If they had simply filled out the IDR application continuing with the same repayment plan (IBR) and selecting Married-Filing-Joint as their filing status, their payment would have increased to $1,604/month.
If they were to file Married-Filing-Separate, the payment would be based on solely Spouse 1's income, and their payment would be $354/mo. Thats a $1,250/mo swing!
I would have suggested they switch to REPAYE if they were adamant about filing Joint since that would generate a lower payment (REPAYE is based on 10% of discretionary income, so their payment would be $1,070/mo) so closer to a $716/mo difference - but still, their crossover point, or the tax difference on their return filing Joint, would need to exceed $8,592 for me to change my mind about them considering filing Separate.
Everyone's financial situation is different - I absolutely recommend speaking to a CSLP® to review if this strategy could be right for YOU and your spouse.
Meagan Landress, CSLP®
Certified Student Loan Professional™
Financial Coach Meagan