The dirty little secret of student loan debt is that there can be a very real penalty to getting married.
Student loan forgiveness programs, such as Public Service Loan Forgiveness, require a borrower to enroll in an Income-Driven Repayment (IDR) Plan. The benefit of an IDR plan is that borrowers make payments based upon what they can afford rather than what they owe. The problem for married borrowers is that these payments are usually calculated based upon what the borrower and their spouse earn.
Some IDR plans, such as Pay As You Earn (PAYE) and Income-Based Repayment (IBR) allow borrowers to file their taxes separately from their spouse in order to avoid a “marriage penalty”. The problem is that this maneuver results in a higher tax bill each April. A couple filing taxes separately will pay more than two individuals who are not married.
Things get even bleaker for borrowers on the Revised Pay As You Earn (REPAYE) plan. On this repayment plan, spousal income is included in monthly payment calculations regardless of how a couple’s taxes are filed.
Avoiding the Marriage Penalty for PSLF
In many households, student debt exceeds all other forms of debt combined. Borrowers working in public service are forced to very carefully consider the consequences of marriage.
One such borrower recently emailed us:
My name is Jenny and I am a Physician Assistant working at a non-profit. I have $250K in student debt and have a current salary of $120K. I am on the REPAYE debt repayment plan and also enrolled in the PSFL program. I am already 2 years into payments on the PSFL and pay $750 monthly.
My main question is about marriage. My boyfriend and I would like to get married, buy a house, and have kids in the near future, but I would like to proceed with the most financially beneficial life plan, even if that means excluding marriage. Could you please offer some advice on this area?
He has no debt and a similar income. It is my understanding that if we file taxes as married but filing separately, under the PSFL/REPAYE I will still have monthly payments based on both incomes. Under these circumstances, we will be in a higher tax bracket.
Based on the above information, I have concluded that, with my debt to income ratio, it is best to not get married and continue on with the PSFL, to pay back the least amount over time.
Are there any unsuspected pitfalls we may incur (e.g. not qualifying for a home loan due to high student debt; unsuspected taxes/penalties once we purchase a house together or have children together)? Also, do you know of any strategies, so that if we opt to not get married (in the state of California we could at the very least have some legal recognition when it comes to health rights, health benefits, children that we should look into? Maybe just appointing each other DPOA for the health-related decision-making? etc.
Also, are there alternative debt repayment strategies I should consider at this current time?
Any suggestions on how to drive down gross income to minimize monthly payments apart from investing in my 403B at work?
My last question is, what happens if the PSFL program is no longer offered over the next few years? Would I likely kick over to an alternative repayment plan and what would that look like (just so I can prepare for the worst-case scenario)
For Jenny, the financial consequences of marriage are clear. The next question is… what are the consequences of not getting married.
[Note: For borrowers who are already married and worried about their repayment options, be sure to check out this article on PSLF for married couples.]
Jenny’s email hits on many of the relevant issues that need to be considered by a couple considering putting off marriage in order to eliminate student debt.
Pitfalls of not getting Married
Marriage is far more than just a ceremony or status as a couple.
Marriage can impact life as an American in many different ways.
Jenny properly notes that by not being married, her boyfriend has far fewer rights in a hospital situation than he would as her husband. A durable power of attorney is a document that would give him the right to make medical decisions should Jenny not be able to do so.
Not being married would also make it very important for Jenny to have a will drafted. A boyfriend or girlfriend really has no special rights in the event of death. A spouse does. Having a will means the significant other is able to receive assets in death such as a house or retirement accounts. Any couple seriously considering not getting married would be wise to discuss the implications in their state with a local attorney.
Transferring property between a married couple and two single individuals is also treated much differently from a tax perspective.
Many pension programs, as well as social security, are impacted by marital status. Not being married can mean that these retirement benefits die with the beneficiary rather than being passed on to the spouse. Obviously, the specific details will vary depending on the pension program and the state the couple resides, but the one thing that is certain is that not being married can have a major impact.
Alternative Repayment Strategies
A couple may decide that forgoing marriage may not be the best route.
Jenny could opt to switch to the Income-Based Repayment plan and file taxes separately once married. Switching from REPAYE to IBR means she will have to make payments based upon 15% of her discretionary income rather than the 10% required under REPAYE. However, by making this switch, she could keep her husband’s income out of the monthly payment calculations. The cost of this would be the higher payments from switching repayment plans and the higher payment on the yearly tax bill.
Alternatively, once married, Jenny could stick with REPAYE and live with the higher payments that are based upon her husband’s income as well. She could still go after Public Service Loan Forgiveness, but the amount forgiven would be smaller.
If PSLF is no longer an option, the best choice may be aggressive repayment. Going this route, Jenny accepts the fact that PSLF isn’t a value for her and just tries to pay off her debt as fast as possible. She could even refinance her student loans, but that choice also comes with risks. By refinancing she could get a lower interest rate allowing her to pay off the debt faster, but the loans would no longer qualify for PSLF or any income-driven repayment plans.
Lowering Payments on Income-Driven Repayment Plans
Jenny properly notes that contributing to the 403(b) at work will give her lower monthly payments on an income-driven repayment plan. This is because 403(b) contributions lower a borrower’s AGI (Adjusted Gross Income) on their tax return.
Anything that lowers AGI will also lower monthly payments on income-driven repayment plans.
Options to lower AGI include:
- Traditional IRA and 401(k) contributions
- Health Savings Account contributions
- Student Loan Interest Payments
This site has previously covered tax strategies to lower AGI and get lower student loan payments.
What is Public Service Loan Forgiveness is Eliminated?
Elimination of PSLF is a real concern. However, the bigger concern for most borrowers should be that they don’t qualify for the program.
To date, only a small percentage of the applicants for PSLF have been approved. Any borrower considering PSLF should make sure that they understand all the PSLF rules and regulations and that they are submitting an employer certification form on a yearly basis.
As for the program being eliminated, borrowers have a number of protections in place.
- It would take a change in the law for the program to be terminated. That means passage in the House, Senate, and Presidential approval. Such a move would be highly unpopular with groups such as law enforcement, teachers, and other public servants.
- Most staffers in Congress also qualify for PSLF. They are unlikely to advocate that their bosses eliminate such a valuable program.
- The contract between most borrowers and the government (the Master Promissory Note) includes PSLF in the terms of the agreement. That means that even if the law changes, borrowers still have a contract with the government calling for the program.
Because of these limitations, all proposals to date to eliminate or cap PSLF have failed. It is also worth noting that every proposal to eliminate or cap PSLF has grandfathered in existing borrowers.
All that being said, Jenny is smart to plan for a scenario in which she doesn’t qualify for PSLF. We suggest creating a high-interest savings account with money set aside for student loan debt. Call it the Plan B account. If the program is eliminated, or Jenny leaves public service, or gets a big raise, the Plan B account can be used to attack the debt. If PSLF ends up working out, that account can be a boost to retirement savings or a new house.
Final Thoughts
This is a huge decision.
Getting married or not getting married is a decision of major consequence.
Finding the right repayment strategy for six figures of student loan debt is critical.
Making things even more difficult is the fact that life could have other plans forcing a borrower to throw their strategy out the window.
The key is to understand the different options available. Think about how future events in your life could change the plan.
There is no absolute right way or wrong way. The best path will be the one that is carefully considered and evaluated.
