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Do I need a divorce for lower student loan payments?

There is a marriage penalty with student loans. Careful repayment plan selection and tax preparation often means that resorting to a divorce isn’t necessary.

Written By: Michael P. Lux, Esq.

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For many borrowers, the best way to lower payments on federal student loans is to enroll in an income-driven repayment plan. These income-driven plans, such as Income-Based Repayment and Revised Pay As You Earn, require payments based upon a borrower’s income rather than the loan balance. This results in a considerable break for borrowers who have low income or large balances.

One thing that complicates these options is marriage. In many circumstances, a married borrower could pay significantly more than a similarly situated single borrower on the very same income-driven plan. While there are ways to reduce the “marriage penalty,” it still does exist.

“Mixed” Couples vs. Double Borrowers

If you and your spouse both have federal student loans and enroll in an income-driven plan, the marriage penalty is reduced. Even though your incomes are combined for the calculation of your ability to pay, your debt is also combined when doing this math.

The math for these couples is complicated, especially for those with kids, but the potential savings from a divorce is usually small.

Things get far more expensive for couples who have only one federal borrower…

IBR, PAYE, and Marriage

Two popular repayment plans are IBR (Income-Based Repayment) and PAYE (Pay As You Earn). On these plans, borrowers are required to pay 10 to 15 percent of their discretionary income towards student loans.

Most couples file their taxes jointly because it usually results in several tax breaks. Couples that elect to file jointly must also use their combined income for purposes of calculating the IBR or PAYE payment. If your spouse has a high income, it means higher monthly payments.

The good news is that there is a way around this issue: filing taxes separately. By filing your taxes separately, your spouse’s income is no longer used for calculating student loan payments.

Unfortunately, this is not a perfect solution. Not only do you lose the tax breaks associated with being married, but filing separately also has different tax brackets than those for single people.

By filing separately, you may pay more in taxes than you would if you were single. This added taxation is the “marriage penalty” for borrowers on IBR and PAYE. The exact amount of this penalty will depend on many factors relating to your taxes and is something that should probably be discussed with an accountant.

REPAYE and Marriage

Things are much worse for married couples with one federal borrower who wants to enroll in the newly created REPAYE (Revised Pay As You Earn) Plan. The advantage of REPAYE is that it lowers payments for borrowers who are not eligible for PAYE. Instead of paying the 15% required by IBR, REPAYE borrowers are only required to pay the 10% as required in PAYE.

The problem comes with how REPAYE treats spousal income and taxes. Whether your file jointly or separately, spousal income is still used in your REPAYE calculation. If your spouse has a substantial income, that means much bigger payments each month. In this circumstance, the “marriage penalty” is much larger.

The only way around this issue is to avoid REPAYE completely. Borrowers should look into IBR or PAYE to evaluate different potential payments.

Should I get a divorce for lower payments?

Obviously, this is a major decision that goes far beyond finances.

Even from a purely financial perspective, it is very complicated. If you are considering going this route, be sure to have detailed conversations with your lender about different payments under various plans and various circumstances. Talking with an accountant can also help you figure out the tax implications of your options and potential savings.

Any potential student loan savings may also be offset by the costs associated with getting a divorce.

Another thing to keep in mind is that the “marriage penalty” really only refers to higher minimum monthly payments. Student loans are loans that, in most cases, must be paid back. Unless you are chasing Public Service Student Loan Forgiveness or another forgiveness program, a higher monthly payment that you can afford is not a bad thing. The sooner the loan is paid off, the less interest you will spend in the long run, and the more you will save.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

3 thoughts on “Do I need a divorce for lower student loan payments?”

  1. Educate yourself with the system, no one else will and they screw you every chance they can. Get a finiancial advisor and lawyer to help, it will in the end. Student loans strangle you and if you have a family it will negatively affect them as well. Divorce or legally seperated is the only way to go…funny how they refer to marriage as a penalty, it shouldnt be. I have a better chance spending $60,000 at winning the lottery than I do making a future for myself and being in debt. The College education & loan system is a farce, its a money making system good luck.

    • I totally agree, Jim! This writer missed one important little detail: if a couple is contemplating divorce to enable lower student loan payments, there will be no divorce penalty or additional expense as mentioned in the article. Those couples would be on the same page, there would be no money to attorneys, no dividing up assets, no child support. Divorced couples in this situation would still live together without getting hosed by attorneys, judges, guardian ad litems, state and federal governments. It’s honestly the best option. Single status IBR for 20 years.

      • Thanks for sharing your thoughts JC.

        Even in the case of an amicable divorce, there will still be some costs associated with the process. Filing for divorce, even without an attorney, still has filing fees that vary by state.

        Additionally, if you are only getting divorced for student loan purposes and wish to remain a couple in all other aspects, there are some additional costs you may incure. For example, if your former spouse ends up in the hospital, you have no rights to visit or give input on treatment. If you or your former spouse die unexpectedly, the divorce can cause a ton of issues. Preparing documents like a power of attorney and a will or trust can address some of these issues, but it costs time or money, sometimes both, to prepare these documents.

        Another consideration is health insurance. By being divorced, your health insurance costs may go up.

        Are there times where getting a divorce makes more sense from a financial perspective? Absolutely. However, I don’t think its fair to say that there isn’t any cost to a divorce.

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