Getting Married: Do I Refinance and Abandon PSLF?

Michael Lux Blog, Refinance, Student Loan Plan, Student Loans 0 Comments

In this edition of the student loan plan, we take a look at Dave’s student loan situation.  He has four of the ten years necessary for Public Service Loan Forgiveness, but is about to get married to someone with a great income.  He is trying to figure out the optimal tax strategy and whether or not he should abandon his pursuit of PSLF and just refinance.  If you want tips for dealing with your student loans, contact us.

Dave writes:

Hello,

I work in student affairs at the University of Texas and I’m looking for some expertise in the PSLF world as I’m about to get married in June.  After reading about PSLF and tax implications, I’m pretty worried about how this might negatively impact my monthly loan payments and/or impact my debt-free fiance’s taxes.

Quick details of our situation:

I’m 4 years into the PSLF program with $100k in law school debt.  My current salary is around $65k, but I’ll be moving to a new position soon that will be closer to $100k.  My fiance makes about three times my current salary, so we need advice about a) the potential tax implications of filing separately v. jointly, and b) the possible benefits of exiting the program to refinance for a better interest rate and pay off the debt on our own.

Any help you can offer would be greatly appreciated!

Best,

​Dave

The Public Service Loan Forgiveness and Marriage Dilemma

One of the big financial consequences of getting married is that couples normally file their taxes together as there are lots of tax breaks for couples.  However, for student loan purposes, this can be a major negative.  Individuals on income-driven repayment plans, such as those working towards Public Service Loan Forgiveness, will often see their monthly payments increase.

In this case, Dave will definitely see his monthly payments increase if he and his wife file their taxes jointly.  This is because his wife has an excellent income and no student debt.

Dave basically has three options at this point:

  1. He can continue working towards Public Service Loan Forgiveness and live with higher payments due to his marriage.
  2. He can work towards Public Service Loan Forgiveness, but file taxes separately.  This will keep his monthly payments lower, but he and his wife will have higher tax bills.
  3. He can refinance his student loans, potentially at a lower interest rate, and aggressively pay off his debt in full.

The best option for an individual in Dave’s situation will vary greatly from person to person.  This is due to discrepancies in debt levels, income, tax situations, and progress towards PSLF.  However, the analysis should be fairly similar.

Option 1: Stick with Public Service Loan Forgiveness

Plugging Dave and his wife’s future income into the Federal Student Loan Repayment Estimator, we see that Dave’s $100,000 law school debt will be paid off in 4 years if he and is wife are making minimum payments on the Revised Pay As You Earn Plan.  The combined income of the couple also means they are not eligible for Pay As You Earn or Income Based Repayment.  The Repayment Estimator can exaggerate repayment periods by a bit because it assumes that you will get a 5% raise each year, but in Dave’s case, the simple analysis is clear: adding his wife’s income makes PSLF worthless.

The Repayment Estimator suggests that with Dave’s $100,000 income and his wife’s $195,000, their monthly payments will be start at $2,255 per month.  Making these large payments, Dave will spend $115,000 on his student debt, assuming his interest rate is about 7%.

Option 2: File Separately and Chase PSLF

If we have Dave and Mrs. Dave file their taxes separately, the numbers change significantly for Pay As You Earn (PAYE) and Income Based Repayment (IBR).  The REPAYE numbers are the same as the previous example, because REPAYE includes spousal income regardless of filing status.

If Dave’s salary stays at exactly $100,000 for the six years he has left towards PSLF, he will pay $630 per month for a total of $45,360 before his debt is forgiven.  If Dave is not eligible for PAYE (if he had federal debt before October 2007), his monthly payments on IBR would be $946 per month for a total of $68,112.

However, we can’t really evaluate the cost of this option without including the higher taxes that Dave and Mrs. Dave would have to pay each year.  A cursory look at the 2017 tax brackets shows that filing taxes separately comes at a high cost.  We won’t speculate as to the exact cost given the many variables at play, but the cost of filing separately over 6 years is something that Dave and Mrs. Dave will need to discuss with their tax advisor.  The larger tax bill may make this option one to be avoided.

Option 3: Ditch PSLF and Refinance

If Dave decides that PSLF might not actually save money, he could look into refinancing his student loans.  This option would permanently take PSLF off the table, but it would immediately lower his interest rate.  If Dave has a 7% interest rate on his student debt, it is generating just over $580 per month of interest on his current balance.  Even if he were to aggressively pay off his debt over the next five years, he still would spend $18,800 in total on interest.

However, if Dave refinances his student loans, he could realize substantial savings.  As an example, SoFi is currently offering interest rates as low as 2.815%.  At this lower interest rate, if Dave paid off his loan in 5 years, he would spend only $7,300 in total on interest, good for a savings of over $11,000.

Making the Choice

Many people make the mistake of trying to maximize amount forgiven or minimize monthly payments. A better way to look at things would be to try to reduce total spending.  For some, Public Service Loan Forgiveness represents the most efficient way to student debt elimination.  For others, aggressive repayment can yield substantial savings.

The only way to know which route is best is to run the numbers for the various options.  It may be tedious work, but it could save thousands.