REPAYE for Married Couples

Michael Lux Blog, Student Loans 2 Comments

The Revised Pay As You Earn Plan, nicknamed the REPAYE plan, is a bit of a mixed bag for married couples.  For some, it is a huge benefit, potentially saving hundreds of dollars each month.  For others, it might seem like a good deal, but it could be a huge mistake.

Today we will discuss the pros and cons of REPAYE as it applies to married couples.  In the student loan world, there are two types of couples.  There are mixed, where one spouse has federal student loans and the other does not.  There are also couple where both spouses have federal student loans.

REPAYE when both spouses have student debt

If both spouses have large amounts of federal student debt, REPAYE can be a great deal.

Suppose that both of you have a combined discretionary income of $100,000.  If you both were enrolled in Income Based Repayment (IBR), your student loan payments for the year would add up to $15,000 ($1250 per month).  By switching to REPAYE, your student loan payments for a year drop down to $10,000 ($833 per month).  This is because IBR requires 15% of your discretionary income while REPAYE only requires 10%.

The calculation for each individual payment gets a little tricky.  To start, the total combined income is first calculated.  Using this number, the total combined payment is determined.  Who pays what is based upon your proportional loan balance.  If you have equal loan balances, you will both have the same amount.  If you have a balance twice as big as your spouse, your monthly payment will be twice as big.  Regardless of who pays more towards their loans, the combined payments will always add up to 10% of your discretionary income.

If one of you enrolls in REPAYE and the other stays on the standard repayment plan, thing get expensive quick.  Instead of paying 10% of your discretionary income, as a couple you will pay 10% of your discretionary income plus the standard payment.  By not both enrolling in REPAYE, things can get quite expensive.

REPAYE when only one spouse has federal student debt

This is the situation where people get critical of REPAYE.  Unlike IBR, REPAYE almost always includes spousal income.  This is because people on IBR can opt to file their taxes separately to avoid having to count spousal income.  On REPAYE, even if you file your taxes separately, the combined income is still used to determine the payments.

Because of this difference, the math for determining the best plan gets a little tricky.  If you have federal student debt and your spouse does not, there are two important numbers to look at.

Option One: File your taxes separately and sign up for IBR.  The benefit here is that the income of your spouse is not included in calculating your student loan payment.  The downside is that your tax bill will be higher and you will be paying 15% of your discretionary income instead of 10%.

Option Two: File your taxes together and sign up for REPAYE.  The good news here is a lower tax bill and payment is 10% of your combined discretionary income.  The downside is that it includes your spouse’s income for determining the payment.

The challenge for borrowers is to figure out which route saves more money in the long run.  This requires some careful tax planning, and an honest assessment of your respective projected earnings.  It is tricky but it can be done.

Once you know the plan you want, it is time to get into contact with your loan servicer…

Working with your loan servicer

It is important to remember that REPAYE is just a few months old.  Just as you the borrower are trying to wrap your mind around the newest federal repayment plan, loan servicers are doing the same thing.  Be ready to have some questions go unanswered, or worse yet, you may even get some wrong answers.  Frankly, this is to be expected from a system where the lowest bidder gets the contract and the less they spend the more they profit.

Undoubtedly, this presents a frustrating situation for you the borrower.  The key here is to remain calm and to remember that there is a human being on the other end of the phone, and someone who is likely grossly underpaid for the difficult stressful job they are trying to do.  Be patient and polite.  If you think there is an issue, identify it and try to work together to find a solution.  You want to be working with the person on the phone; not against them.

Bottom Line

REPAYE can be great for some married couples, but an expensive mistake for others.  The key is to understand the different factors that determine your payments and to put together a long term plan that works.  Remember, the best student loan plan isn’t necessarily the one that results in the lowest payment for the next month or the next year.  It is the one that eliminates the debt in an efficient workable approach.