Mailbag: Large Student Loans, Marriage, and Monthly Payments

Michael Lux Blog, Mailbag, Student Loans 0 Comments

We must be approaching wedding season.  Lately we have received a bunch of emails  from readers concerned about how getting married would affect their student loan situation.   Today we will be looking at Jane’s situation.  Jane has large private and federal student loan balances and wants to figure out how marriage will affect her student loans.  If you have a question for the Sherpa, feel free to ask us!

Jane writes:

Hi!

I have major student loan debt and I am wanting to consolidate, but I am not sure which payment plan is the best.  My partner of 6 years and I have not yet married, one reason being my excessive student loan debt.  We have two children and he is currently the stay at home parent.  I graduated in 2009 as a physical therapist, making $88,800 annually.

Currently, I owe:
$114,681 through Great Lakes
$28,260 through Ed Financial
$92,121 Through Navient

I also have around $85,000 through a private signature student loan which I currently have on a rate reduction plan.

Being a single parent income household, I am worried about my monthly payment when I do consolidate, but I also worry about when we do get married and when my husband is out in the work force what that will do to my payment.  I am lost and do not trust the lenders to help me choose a payment plan, so any advice will be wonderful!  

Thank you!

Sincerely,

Jane

Picking A Repayment Plan When Married

Jane’s instinct that her marriage will affect her student loan payments is absolutely right.  There are a number of variables that come into play when picking the right repayment plan:

  • When will Jane’s partner be going back to work? – As a stay at home parent, being married will not increase the household income and will not increase Jane’s monthly payment.  Once there is a second income, things get more difficult.
  • How far away is marriage? – This is obviously a very personal question.  However, from a financial perspective, it matters a lot.  Right now Jane could opt for the payment plan that results in the lowest monthly payments and then switch plans once married.  However, changing repayment plans means capitalizing interest.  With Jane’s large federal balance, this could be an issue.
  • What do the future earnings look like?  – Jane already makes a great salary, but she also has a huge student loan balance.  The more accurately she can project future earnings, the easier it is to put together a good plan.

With the federal student loans, an income-driven plan is definitely the way to go.  Based upon Jane’s student loan balance and salary, the monthly interest on her loans is likely larger than her monthly payment.  This means that the balance is actually growing rather than shrinking.  Right now that extra interest hasn’t been added to the balance.  However, changing repayment plans or consolidating will cause it to get added to the principal balance.  This is called interest capitalization.

Choosing the Revised Pay As You Earn (REPAYE) plan might be the best plan for right now.  Unlike the other income-driven plans, only half of the excess interest finds its way back to your balance.  This means you have a lower effective interest rate on this plan.  The problem with REPAYE is that spousal income is counted no matter how you file your taxes.  If Jane gets married and her partner generates income, payments will go up.

The only way to avoid spousal income from counting is to file taxes separately and sign up for Pay As You Earn (PAYE) or Income Based Repayment (IBR).  This results in a higher tax bill each April, but lower monthly payments on the federal loans.

Be sure to check out our article on Income-Driven Repayment Plans to get an idea of the different plans available and some of the pros and cons for each plan.  Once you have an understanding of the different plans, check out the Federal Student Loan Repayment Estimator to see calculations based upon your income and loan balances.

Managing a Large Balance

Jane’s question was about picking the best student loan repayment plan, but before we can pick the best repayment plan, it is important to first have an idea about an overall strategy.  If Jane makes the minimum payments on all her loans, she will spend decades with a very large student loan balance.

One thing Jane has in her favor is that she has a pretty good income.  As a result of Jane’s large balance and large income, it isn’t immediately clear if she will be better off chasing student loan forgiveness or just aggressively paying off the debt.  There are a ton of variables in play her, so the best way to figure it out will be to make a spreadsheet to see how the numbers play out in different circumstances.  What happens if Jane’s salary doesn’t increase?  What happens if Jane gets married now or in five years?  What happens if Jane’s salary doubles?

The repayment estimator shows how much will be spent on each repayment plan and how much might potentially be forgiven at the end.  However, it is important to note that the repayment estimator makes certain assumptions about salary increases each year.  If these assumptions are wrong, be sure to adjust accordingly.

The Consolidation Issues

Jane mentioned consolidation as if it was a certainty that she would be going this route, but it isn’t always the best move.

With federal student loan consolidation, borrowers do not get a better interest rate.  Most people choose to this route to get loans eligible for repayment plans or forgiveness programs that they might not otherwise be eligible for.  This is something that should be discussed with your loan servicer because there is no way to undo a consolidation, and mistakes can be devastating.

The option of private student loan consolidation also exists (private and federal loans can be consolidated with a private company), but for Jane’s federal loans that would likely be a mistake.  Given how large her balance is, she is probably best served by keeping the loans with the federal government.  This keeps the option of income-driven repayment plans and forgiveness on the table.  If Jane’s salary dramatically increases, she might want to revisit this option.

For Jane’s private loans, private consolidation might be a smart move.  It all depends upon whether or not she can get a better interest rate.  From her email, it looks as though her lender has already reduced her interest rate, so she might be hard pressed to get a better one.  However, if she can get a lower interest rate with one of the many private student loan consolidation companies, this might be a good option for her private loan.

Bottom Line

Putting together a plan in Jane’s situation is not easy.  It requires understanding the various federal student loan repayment plans and how her circumstances can change her monthly payments.  It also requires getting an understanding of the various forgiveness provisions.  Finally, Jane needs to understand the tax implications of both getting married and loan forgiveness.

Once she has her head wrapped around the various concepts, it is time to do a little math to figure out which one will work best for her.

The best route is likely to put together a plan of action for now, and to revisit it each year around tax time.  It isn’t an easy task, but with some time and patience, it can be done.