February 21, 2021
Sherpa, could use some advise regarding income based repayment vs. filing taxes separate.
Loans: I have no loans. Spouse currently has $86k in federal direct loans (grad and undergrad). She bounced careers around, had deferments while in grad school/unemployed, and is now working for K-12 public school, qualifying for PSLF. We’ve paid some down/off over the years, but just starting the repayment/PSLF process. She is committed to remain with this PSLF qualified employer for the duration.
Income/Taxes: She makes $26k a year and I make about $90k. Neither expects to change jobs and wages should stay about the same (maybe up to 3% annual union contract increases). We have filed joint up to 2019. 2 kids (age 16 and 11).
Issue: Thinking about filing separate for 2020. The total difference between joint and separate paying $2,500 more in taxes for married filing separate. I crunched the numbers with studentaid.gov and their loan simulator.
If we file together, best option is REPAYE loan payment is $524 a month (and will increase to $899 over those 10 years). Total PSLF (filing together) is about $35k at the end.
If we file separate (isolating just her income), the total payment under IBR is zero.
Thinking for current year, $2,500 in taxes definitely offsets over $6k in loan payments. Wondering if I’m on the right track to commit to 10 years of married filing separate?
May 3, 2014
It sounds like you are making the appropriate calculations and comparisons. Well done.
I have a couple of additional thoughts for you to consider.
First, I don’t know that committing to any plan for the next 10 years is the best idea. Over the past 10 years, we have seen 3 new IDR repayment plans created. Given the complicated issues that many couples such as yourself deal with, I wouldn’t be surprised if this issue was addressed at some point. If you investigate this issue each year at tax time, you will be less likely to miss out on opportunities to save.
Second, this year is unique due to the Covid-19 relief. Federal interest rates are at 0% and payments are suspended until at least October. It could be stretched even longer. It doesn’t sound like this detail has been included in your analysis and it could definitely shift the math.
February 21, 2021
Thanks for the quick reply.
The 10 year plan is only predicated on the PSLF, which needs those magic 120 payments. Do you think IDR plans, in the future, will remove the ability to separate spouse’s income (making MFS a moot point)?
My big concern is maximizing the PSLF benefit (ie pay as little as possible for as long as possible until qualified). Edit: i’m seeing your point now – thinking MFJ joint this year and use just those 3 payments towards the end of the year (Oct-Dec) as the math to weigh MFJ vs MFS. That said, how soon after filing 2021 taxes (potentially separately) would that IRS data be available to student aid? Thinking I might need to weigh early 2022 payments in this math.
May 3, 2014
More great questions.
I think that fixing the spousal income issue is possible but not likely. I’d say there is maybe a 30% chance it happens in the next 10 years.
I’m not sure how long it takes for filed taxes to be available for income certification. I suspect it would be pretty quick, it may be as soon as the taxes are filed or you may have to wait until the tax return is accepted by the IRS.
Also, because you mentioned maximizing the PSLF benefit, you may want to check out this article that just went live this morning: https://studentloansherpa.com/…..rgiveness/
Hope that helps!