Over the last few days, I’ve received several questions about IBR, and other income-driven plans such as REPAYE and Pay As You Earn. It seems there is a ton of confusion about calculating income-driven payments with spouses who each have student loans.
Many couples fear that if they get married, their student loan payments will essentially double. This is not the case.
Your payments may change if you get married, but the change depends upon several details.
The Rules for Couples on Income-Driven Repayment Plans
I usually don’t like to dwell on the research that goes into each article, but given that there is so much contradictory information out there on this topic, it is probably prudent.
Like any student loan issue, it starts with a call to the student loan servicer. When I asked about how marriage would affect my student loan payment, I proposed the following hypothetical. Suppose my spouse and I each make $40,000 per year, both have student loans, and both are on IBR. Will our payments be the same as two single people making $40,000 per year, or will they be double? I was told confidently (and incorrectly) that our payments would be double.
Because I was reasonably confident that the provided information was incorrect, I politely went through several other hypotheticals with my lender. Eventually, the customer service representative changed her answer. She explained that if we both were on IBR before marriage and then got married, our total payments should remain the same. She based this response on the Income-Driven Repayment application form. This particularly clever customer service representative noticed that you could submit information about your spouse’s federal student debt. They wouldn’t ask for this information if it didn’t count. Thus, she concluded that her initial answer was wrong and that payments would not double if two IBR borrowers got married.
Not being fully satisfied with this answer, I then turned to Google for further help based upon the information from my lender. A bit of legal research followed. Eventually, I found the definitive answer in the form of the Code of Federal Regulations, specifically, 34 CFR 685.221(b)(2)(ii), which states that when calculating IBR payments:
The Secretary adjusts the calculated monthly payment if—Both the borrower and borrower’s spouse have eligible loans and filed a joint Federal tax return, in which case the Secretary determines—
(A) Each borrower’s percentage of the couple’s total eligible loan debt;
(B) The adjusted monthly payment for each borrower by multiplying the calculated payment by the percentage determined in paragraph (b)(2)(ii)(A) of this section; and
(C) If the borrower’s loans are held by multiple holders, the borrower’s adjusted monthly Direct Loan payment by multiplying the payment determined in paragraph (b)(2)(ii)(B) of this section by the percentage of the total outstanding principal amount of the borrower’s eligible loans that are Direct Loans;
Similar language for PAYE can be found at 34 C.F.R. § 685.209(a)(2)(ii)(B).
This legal jargon basically says that the total IBR payment is calculated for the couple. Individual payments are then based upon the portion of the debt in the name of that particular spouse. So if your spouse has twice the student debt you do, if you both are on IBR, her payment will be double yours.
Avoiding Confusing Information
Many customer service representatives will get this information wrong as mine did. This is a pretty complicated bit of student loan rules, so it isn’t reasonable to expect them to advise you on this subject perfectly.
Perhaps the most harmful source of bad information is the department of education student loan calculator. This estimator does not account for spousal student debt but does include spousal income. So if you estimate your payment, and then estimate your spouses, it is possible you will get a number double what you owe.
UPDATE 11/7/16: Great news on the repayment estimator site… it now includes an option to list spousal income as well… meaning this previously lousy resource is now very helpful!
Calculating Monthly Payments
Now that the Department of Education’s Student Loan Estimator is working for married couples who both have student debt, borrowers can estimate their monthly payments as a married couple.
For those that want to understand how the calculations are made, the Department of Education is first looking at the combined adjusted gross income (AGI) of the couple from their most recent tax return. From that number, the Department will calculate the discretionary income of the couple. Depending upon the Income-Driven Repayment plan selected, the couple will be responsible for paying 10, 15, or 20% of their discretionary income towards their federal student debt. (Up to this point, the process for single individuals and couples is the same.)
When couples both have federal student loans, the payment is split proportionally to how much each partner has borrowed. The spouse who borrowed more will be the one with the higher payments.
How Married Couples Pay More on IBR and PAYE
Now things get complicated.
Even though the double payment concern doesn’t exist, it is still possible that payments will go up.
The increase can be traced back to the discretionary income math. Loan payments are based upon discretionary income, defined as earnings above 150% of the federal poverty level.
A quick example of payment calculations will help illustrate the issue. Suppose I earn $44,000 per year, and the federal poverty guidelines say that 150% of the poverty level is $20,000. My discretionary income is $24,000 per year or $2,000 per month. If I was on PAYE, 10% of my monthly discretionary income would be $200. Thus, I pay $200 per month on PAYE.
For couples who both have student loans, filing jointly or separately impacts the amount of money that you keep each year before you have to make payments. If you file separately, you get to keep that first $20,000 and your payments are based upon the rest. Your spouse also keeps the first $20,000 making payments based upon the additional income. By filing separately, you EACH get to keep that first bit of income.
If you file jointly, as a couple, you only get to keep that first bit of income once. If your combined income is $90,000, you subtract that $20,000 from the poverty guidelines once, leaving $70,000 of discretionary income. Because of this distinction, a couple will pay slightly more if they file jointly.
For many couples, the slight increase won’t be enough to justify the larger tax bill from filing separately. However, the only way to know for sure is to do the math on filing jointly and filing separately. Between tax programs that quickly estimate your tax bill and the Department of Education Loan Simulator, comparing the two options isn’t difficult.
When Married Couples Who Both Have Student Loans Should File Separately
Adding kids to the equation can change the math.
As one reader noted in the comments, being in a family of four means that the poverty guideline number is much higher than it would be for just two. Filing separately and being able to subtract that number twice can make a big difference.
The larger your family, the bigger the potential savings from filing separately, even if you both have student loans.
The Short and Simple Answer for IBR and PAYE Couples who Both Have Student Loans
- Filing taxes jointly does not mean your student loan payments will double.
- Filing taxes jointly does mean that your monthly payments will be somewhat higher.
- If you have a larger family, the IBR and PAYE benefit of filing separately goes up.
- Borrowers should compare the potential savings of filing separately against the higher taxed bill caused by filing separately.
As a final thought, I’d also like to point at that getting a low IBR or PAYE payment is not the goal of federal student loan borrowers. The goal is to eliminate the debt. For borrowers chasing after student loan forgiveness, the lower payments are valuable. If you are eventually going to pay the debt off in full, lower monthly payments just mean the loan will cost more in the long run.