It doesn’t seem fair.
Married borrowers are often expected to pay more on their federal student loans than a borrower with the same income who happens to be single.
Income-driven repayment plans are one of the great perks about federal loans because they help ensure that student loan borrowers can always afford their monthly student loan payments.
Unfortunately, the formula for determining what a borrower can afford often includes the salary of their husband or wife.
There is no question that there is a penalty for married borrowers. Instead, the question is, how do I handle this situation and minimize the expense?
The good news is that there are several ways to address this problem.
How can my husband or wife’s income increase my monthly fed loan payment?
Before jumping into possible solutions, it is worthwhile to take a moment to understand why spousal income can cause student loan bills to go up. After all, solving a problem can be really difficult if we don’t understand the problem we are trying to solve.
Borrowers enrolled in an income-driven repayment plan for their federal loans have to certify their income each year. Typically, this income certification takes place using the borrower’s most recent tax return.
The borrower’s Adjusted Gross Income (AGI) will determine monthly payments. When couples file their taxes, the AGI is calculated based upon the combined income of the couple.
Based upon the rules currently in place, the government has decided that an individual’s ability to make payments on their student loans changes based upon the income of their spouse. If your husband or wife has a large income, the government expects you to pay more.
Fortunately, there are a couple of tricks that can be used to minimize the marriage penalty for student loans.
A Special Note for Couples who both have federal loans:Getting married may cause changes in student loan payments, but as a couple, your combined income-driven payments should remain approximately the same. If one spouse pays 10% of their discretionary income on a $50,000 salary while the other spouse pays 10% on a $40,000 salary, it is roughly the same as paying a total of 10% on a combined $90,000.
In other words, there usually isn’t a marriage penalty if you both have federal loans.
Can I just use a paystub to certify income so that my spouse’s income isn’t included?
If the combined AGI is the number that causes the problem, it would stand to reason that submitting alternative documentation of income, such as a paystub, would fix the issue.
Sadly, it isn’t that simple.
When borrowers certify their income, the form requires information about marital status and spousal income.
Alternative documentation of income will not exclude your husband or wife’s income.
However, there is one tax decision that can make a big difference…
Filing Taxes Separately
Couples that file their taxes as “married filing separately” do not have to include spousal income when calculating monthly payments on certain income-driven repayment plans.
Unfortunately, this approach isn’t necessarily an easy call for married borrowers.
By filing separately, the IRS may impose a larger tax bill. Many important tax breaks are not available to individuals who file separately. Notably, couples that file separately cannot take the student loan interest deduction.
Further, filing separately only helps with certain income-driven repayment plans. Borrowers on the IBR, PAYE, and ICR plans can lower their tax bill by filing separately, but those on REPAYE will still have to include spousal income.
When it comes to tax strategy, many different variables enter the equation. Those considering this route should review the issues that come into play when filing separately to save money on student loans.
Changing Repayment Plans
Not all repayment plans require income documentation.
Borrowers looking for lower monthly payments may be better off with the graduated or extended repayment plans. Monthly payments on these plans are based upon the borrower’s balance. To get an idea of what your payments might be on the various plans, the Department of Education’s Student Loan Repayment Estimator is an excellent tool.
Those considering switching repayment plans need to carefully consider the impact on student loan forgiveness. While the income-driven plans qualify for multiple types of student loan forgiveness, the graduated and extended plans are not eligible.
Aggressive Repayment of the Debt
Some borrowers may find that the higher monthly payment is more of an annoyance than a huge financial burden.
Couples in this situation may want to consider aggressively repaying the debt.
The idea here is that the faster the debt is paid off, the less will be spent on interest. Paying more now means savings in the future. Many refinance lenders will also refinance the loans at a lower interest rate to help borrowers find additional savings.
The downside of aggressive repayment is that you are taking student loan forgiveness off the table. For some borrowers, this is a savvy move; for others, it might be a bit too risky.
Should we consider a divorce?
If there is a “marriage penalty” to student loan borrowers, it would seem that divorce might seem like a possible solution.
While there may be potential student loan savings to be had, getting a divorce involves far more than just signing a couple of forms.
In addition to the many financial and social consequences of a divorce, there are other issues that borrowers must consider. One example would be visiting your spouse during a hospital stay. Those that are divorced have significantly fewer legal rights.
Anyone seriously considering this step should sit down with a divorce attorney so that they can understand the many consequences to getting a divorce purely for financial reasons.
An Important Final Thought
Much of this article has discussed how marriage can impact minimum monthly payments on income-driven repayment plans.
Those planning their student loan repayment strategy should focus on debt elimination rather than monthly payments. For most borrowers, the loan will have to be paid off in full. Paying extra money each month may not be convenient, but it will save money in the long run.
Don’t get carried away focusing on the next 12 months. Instead, think about the next 12 years.