On their own, income-driven repayment plans like Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Saving on A Valuable Education (SAVE) can be complicated. When borrowers get married, the repayment strategy and calculations get even more complicated. Married borrowers who live in community property states face the most complications.
Couples who live in community property states can get lower monthly payments by signing up for IBR, PAYE, or SAVE and filing their taxes separately. However, the process can be confusing, and federal loan servicers do not make it easy.
Optimizing income-driven repayment in a community property state requires some tax considerations, math, and navigating red tape.
The Advantage of “Married Filing Separately”
One of the major downsides to the federal Income-Driven Repayment (IDR) plans is the calculation of income for married couples.
The purpose of income-driven repayment is to allow borrowers to make payments based on what they can afford rather than what they owe. Borrowers can choose from one of several Income-Driven plans that charge 5, 10, 15, or 20% of the borrower’s discretionary income.
Many couples are often upset to learn that discretionary income calculations are based upon a couple’s combined income. This means that marriage can result in significantly larger payments.
These higher payments can be avoided if the couple files their taxes as Married Filing Separately. Borrowers on Income-Based Repayment (IBR), Pay As You Earn (PAYE), Saving on A Valuable Education (SAVE) and Income-Contingent Repayment (ICR) can exclude their spouse’s income from calculations by filing separately. The old exception to this rule was the Revised Pay As You Earn (REPAYE) plan, but this plan was replaced with SAVE and no longer has strict rules for couples.
While filing separately can mean lower student loan payments, it also potentially means a larger tax bill. The tax brackets look much different for married couples and single filers.
Couples will have to decide if the lower student loan payment justifies the higher tax payment each April.
Note for Couples who both have federal loans:
The benefit of filing separately is greatly reduced. As couples have more children, the benefit of filing separately increases.
Student Loans in Community Property States
The United States has nine community property states. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska also has an optional community property system.
In community property states, assets acquired by the couple are presumed to be jointly owned. This policy affects student loan borrowers who try to file taxes separately to secure lower student loan payments. Rather than listing individual income on a married filing separately tax return, taxpayers have to report 1/2 the combined income of the couple on the tax return. This policy can have a significant impact on the potential savings from filing separately.
If the husband has federal student loans and an income of $50,000 per year, it might make sense to file separately from his wife, who earns $100,000 per year. In most states, by filing separately, the husband would have his student loan payments calculated based upon that $50,000 in income. In a community property state, the husband’s monthly student loan payment would be based upon an income of $75,000. In this example, the couple would be better off if they didn’t live in a community property state.
The good news for couples living in community property states is that there is one way around the jointly owned property issue…
Avoiding Using Spousal Income in Community Property States
If your most recent tax return does not accurately reflect your income, borrowers are allowed to provide alternative documentation of income. Typically, the alternative documentation is a recent paystub. However, borrowers may also provide their servicer a letter in more complicated situations.
The significance for borrowers in a community property state is that it is possible to avoid using 1/2 your combined income as the starting point for payment calculations.
In other words, there is a procedure for couples in community property states to exclude spousal income from IBR calculations.
Borrowers need to do the following:
- File taxes separately,
- Apply for income-driven repayment using alternative documentation of income, and;
- Provide recent paychecks instead of a tax return.
Thus, to treat federal borrowers in community property states the same as borrowers in non-community property states, the Department of Education allows alternative documentation of income to get around the AGI calculation rules in community property states.
Final Thought on Filing Separately
Couples in community property states don’t have it easy, but they can file taxes separately to get a lower monthly payment on an Income-Driven Repayment plan.
However, just because something can be done doesn’t mean it should be done. Filing separately means a bigger tax bill. It also means a yearly hassle documenting income. The bigger tax bill and extra work doesn’t mean a smaller student loan balance; it just means lower monthly payments.
Borrowers working towards Public Service Loan Forgiveness may find that they come out ahead by going this route. Couples without a plan who want lower monthly payments may find that they end up spending more in the long run. In most cases, the debt will have to be paid in full and getting lower monthly payments will only delay repayment… not avoid it.
Hi –
1) I live in a community property state (Louisiana). I got married in 2022, and have been submitting my annual recertification using my paystub or a letter (for instance, when I am out of work and have essentially no individual income). I never use my tax return. My husband is the higher earner. We file married but separately. Based on this article, I think I am doing this correctly – that is, I am only submitting information (paystub or letter) showing my individual income and NONE of my husband’s income instead of my tax return (which would show 1/2 of our communal income as my income). I wanted to confirm that this strategy is still a legal loophole and isn’t something the servicer / government will penalize me for later?
2) Also, I recently started a new job and will be resubmitting another recertification form to switch to the PAYE plan. This is beacuse I’m on the SAVE plan now but want to earn PSLF credit and can’t get PLSF credit while the federal litigation continues to pause the SAVE plan. The recertification form, Question 11, states: “1. Has your income significantly decreased, or your marital status changed since you filed your last federal income tax return?” and only lets you submit alternative documentation if you answer “yes”. If you answer “no” then you have to submit your tax return. Technically, my individual income (my paystub) has increased because previously I was not working, but I still want to submit my paystub instead of using my tax return because it is more accurate and will benefit by lowering my payments in the long-term since I am the lower earner in our marriage. How do I get around answering this question falsely?
Great questions—you’re clearly ahead of the curve in how you’re thinking about this.
1. On using your paystub instead of your tax return:
Yes, in a community property state like Louisiana, filing Married Filing Separately and using a paystub or letter to certify just your income (not your spouse’s) is still allowed under plans like PAYE or IBR. It’s not a loophole—it’s a legit workaround to avoid getting stuck with inflated payments based on half your spouse’s income.
That said, family size rules have changed—if you file separately, your spouse no longer counts in your household size, which can slightly increase your monthly payment. Also, with future IDR reform on the horizon (especially after July 2026), this strategy may not be available long-term.
2. On Question 11 of the IDR recertification form:
Here’s the catch—the form now asks if your income has “significantly decreased” since your last tax return. If your income has actually gone up (e.g., from $0 to new job), then technically, you’re not supposed to check “yes”, which means you’d be required to submit your tax return—even if it doesn’t reflect your actual individual income.
It’s a frustrating flaw in the system for people in your situation. Some borrowers still try submitting paystubs with an explanation letter anyway, and sometimes servicers accept it. But just know it’s not guaranteed.
Hi there have a quick question – we live in a community property state and my wife who is a physician has over 300k in loans (and in year 7/10 in PSLF through IBR). I have no loans and my wife makes 2x more than me as a physician. In our instance it doesn’t make sense to file separately since only she has has school loans (and filing alternative documentation has no benefits) since her income is higher than mine and wouldn’t lower the monthly payment based on the 50/50 income split initially when filing?
The initial payment would depend on how you documented your income (alternative documentation vs. last tax return).
Two things to keep in my in your situation: the key number is the AGI. I’d encourage you to take up this topic with whomever prepares your taxes. Second, remember that there is a cap on IBR payments (based on the 10-year standard plan). Depending on your wife’s salary, she may be at or near the cap no matter how the taxes get filed.
appreciate the feedback!
Do you just submit the pay stub? If so do you recommend writing anything or circling anything on it? I hear some horror stories of them just taking the wages and multiplying it out by pay periods but not counting 401k, retirement and etc so payments are being calculated to high. Would you recommend additing a letter or anything with pay stub to explain it and ensure they calculate it the same as we do?
Some explanation with the paystub is a clever idea, I could certianly see it helping prevent a calculation issue. I’d suggest reaching out to your servicer, explaining the issue, and asking for their suggestion. Simple steps like highlighting the accurate line on your paystub could help.
For people who get stipends throughout the year on the pay stub. Would you be better off submitting income certification at the beginning of the year before the stipends hit so the gross wages are lower and the lack of the stipends when the wages are annualized be much lower. Example I submit my 1st pay stub for the year before stipends which dramatically lowers my income. Should I be concerned that my income is much lower without the stipends and the servicer discovering this later or anyone else and slapping me for it? Seems like its the ideal way to go about it just dont want to put myself in a pickle down the road.
Generally speaking, if your income is holding steady from one year to the next, using your tax return is the best route to getting lower monthly payments. It would also avoid the stipends messing up your calculations.
Thanks for the article! You addressed a scenario where the spouse with debt was the lower earner. But wouldn’t there be a huge advantage of living in a community property state in the opposite scenario? For example John is a MD who has 400k in loans and his spouse Julie is a stay at home mom with no debt. Assume John is going for PSLF or SAVE forgiveness and wants to minimize payments. If they filed separately they could split the income 50/50 and half the minimum payment. What do you think?
That sounds like an excellent way to take advantage of the community property rules.
This is a great article! I have one question and have gotten many different answers from my servicer. I am on the Repaye plan and wish to file married but separately. Everything I had read online states that this one plan does not allow me to file this status, so I was planning on switching to IBR. But I called my servicer today who is now telling me that as of 2021, the REPAYE plan does allow that filing status. Do you know if this is true?
Michelle,
This is an excellent question. Your understanding of REPAYE is mostly correct.
As the rules stand right now, filing separately does not help lower REPAYE payments. However, President Biden recently proposed a new repayment plan.
This new plan would be a refresh of the REPAYE plan. One of the notable tweaks is that it would allow borrowers to file their taxes separately for lower payments, like the other IDR plans.
Unfortunately, this plan hasn’t been officially created yet. It is still going through the rulemaking process. It is possible that the new feature for married couples doesn’t make it to the final version. That said, I think there is a chance that before this year is over, you will be able to file taxes separately and stay enrolled in the REPAYE plan.
Hi and thank you for this article. We now live (moved from UK) in a community property state (AZ), and we are finalising our 2021 taxes just now. I understand from your article that I can hopefully make the loan servicers understand my actual income, not what my tax return will reflect. (my spouse’s income has inflated my income significantly, and I will not be able to pay the IBR payments).
In any case, will they accept my pay stubs if I am paid in UK pounds? I work for my UK employer remotely.
That is a really interesting question. I don’t see why they shouldn’t, but I’ve never seen this approach used before. If it doesn’t work, you may have to come up with some alternative methodology to document your income, but your servicer should be able to help.
Thank you very much. I will attempt to submit my UK pay stubs along with a letter from my company documenting the foreign exchange rate of annual salary. Fingers crossed it will work.
Hello. You were kind enough to answer a question of mine several weeks ago. I have one more question before I consolidate my loans.
I have two consolidated FFELP loans from 2006 which together are approximately $25,000. I have one unsubsidized and one subsidized loan from 2006 which together are approximately $22,000. I have two subsidized and two unsubsidized loans from 2007 which all together are approximately $63,000. Will I be eligible for PAYE, IBR or PAYE after I consolidate these federal loans since some originated prior to 2007 or will my new loan date be the date of consolidation. I am preparing to consolidate and want to utilize a plan where I can be married and file taxes separately. I appreciate enormously your answers. Thank you.
Based on your description, it sounds like you will not be eligible for PAYE whether you consolidate or not. Likewise, you won’t be eligible for “IBR for New Borrowers” either.
Consolidation shouldn’t impact your REPAYE or IBR eligibility. However, filing separately won’t lower your REPAYE payment.
I know I’m giving you mostly bad news here, but it sounds like IBR is your best option based on your comment. That said, if you have any questions or concerns, I’d encourage you to call your servicer for clarification. They can pull up your account and look at your loans to verify eligibility.