student loans for couples: taxes, repayment, retirement and buying a home

Student Loans and Marriage: Everything You Need to Know

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  • Like it or not, student loans can have a huge impact on a marriage
  • Student loans affect a couple’s ability to pay for a wedding, have kids, and retire
  • Couples with student debt need to plan tax strategy carefully
  • The Marriage Penalty for student loan borrowers is a real problem
Getting married is a joyous occasion and a dream come true for many.  When one thinks about marriage, thoughts of an exciting wedding, a honeymoon and a beautiful future enter the mind.  Unfortunately, student debt can be a heavy burden on many marriages.

The good news is that with proper planning, the consequences of student debt can be a purely financial issue.  Without proper planning, student debt can become a source of hurt feelings and broken trust.

Today we will look at the many different ways student loans can potentially impact a marriage and discuss strategies to minimize any potential impact.  Just as every relationship is unique, the impact of student debt can also have unique consequences.  The key is to understand how student debt can affect monthly finances, tax strategy, and lifestyle.  By understanding how these different variables interact, couples can form a plan specific to their needs.

The first step is having an honest discussion about student loans…

Talking with Your Significant Other About Student Debt

There really isn’t a good time to drop the student loan bomb on a love interest.  Do it too soon and you risk scaring them away.  Wait too long, and you have been hiding a secret.

To make the conversation go as smoothly as possible, step number one is to make sure you have a solid understanding of your student debt.  How much do you owe?  What is your plan for paying it off?  What are you interest rates?  How long will it take?

Many borrowers don’t know the answers to all of these questions.  Some people have so much debt that they don’t know how they will ever pay it off.  Others can point to the exact month and year that their debt will be eliminated.

Regardless of where you fall on the spectrum, your debt will affect your future, and it will like affect the future of your significant other.

One key impact of student debt is that it can affect how couples pay their taxes.

Married Couples: Do We File Taxes Jointly or Separately?

Tax planning with student loans is a delicate balancing act.  On one hand, there are many tax advantages to filing taxes jointly.  A quick look at the tax bracket table shows that most couples could save a bundle in taxes by electing to file jointly, rather than separately.

The problem is that by filing jointly, spousal income is used when calculating monthly payments on an income-driven repayment plan.  This is a huge issue for federal borrowers.

Borrowers on an income-driven repayment plan pay a portion of their monthly discretionary income towards their student loans.  For example, a borrower on the Pay As You Earn Plan would pay 10% of their discretionary income each month towards their debt.  If that borrower is married, the combined income of the couple would be number used for calculating ability to pay, unless they file their taxes separately.

[Further Reading: Which Income-Driven Repayment Plan is Best?]

Note for Couples who both have federal loans:
There really isn’t a benefit to filing separately.  If one spouse pays 10% of their discretionary income on a $50,000 salary while the other spouse pays 10% on a $40,000 salary it is roughly the same as paying a total of 10% on a combined $90,000.

To understand how the income-driven calculations work, the federal repayment estimator is a very helpful tool.  The repayment estimator will allow couples to try different income levels, tax filing strategies, and repayment plans to see which works best.

Each married couple will need to compare the cost of filing separately against the potential monthly payment savings of filing separately.  Couples can either opt for a lower tax bill in April, or lower student loan payments throughout the year.  If you have your taxes filed by a professional, this is a topic that should definitely be discussed.

Be careful not to lose track of your goals!  Getting a lower minimum monthly payment on your student loans is definitely a good thing, but the debt still has to be paid back.  If your spouse is working towards a student loan forgiveness program, such as Public Service Loan Forgiveness, it might make sense to chase the lowest possible payment.  If not, living with higher monthly student loan payments might not be the worst thing because it will force you to pay back the debt sooner.

The Marriage Penalty on Student Debt

The math from the tax analysis should make one thing perfectly clear: there is a measurable cost to getting married if you have federal student loans.

The exact cost of the marriage penalty will depend on a number of different circumstances, but two single people could be better off financially than they would as a married couple.

Setting Money Aside for Retirement

Though far off for some, most couples look forward to one day retiring.  Student debt can be a big hurdle in saving for retirement.

Retirement math may seem complicated, but the basic concept is simple.  Get interest working for you.  Saving money in a retirement account allows that money to grow for when you need it in retirement.  The sooner you start saving, the more your money can work for you.  Student loans work in the opposite way.  Time and interest are the enemy.  For many borrowers, student debt makes saving for retirement extremely difficult.

Married couples have an advantage over single individuals when it comes to saving for retirement.  Two incomes can mean two different retirement programs.  Two incomes can also help pay off a house faster.

If one spouse has access to an excellent retirement program at work, the couple could focus their retirement planning with one income and use the other spouse’s income to pay down the student debt.  The retirement planning advantage for couples is the flexibility.

Weighing the option to pay down student debt or save for retirement can be tricky.  The key is to get the most out of every dollar.  For some, the next dollar will go further if it is used in a retirement account.  For others, that dollar will do the most good if it is used to pay down student debt.

The following list of priorities should be helpful in deciding the best way to allocate your resources:

  1. Basic Living Expenses – Everyone needs a roof over their head food in their belly.  This should always be the first priority for any couple.  These necessities don’t have to be fancy, but they cannot be neglected.
  2. Minimum Monthly Payments – All student loans have a minimum monthly payment.  Wanting to save for retirement is great, but if your loans go into default, the late fees and collection costs will cause a nightmare. Before getting crafty with your financial planning, first make sure that you are paying all of your bills.
  3. Retirement Matching at Work – Now we come to the free money portion of the equation.  Many employers will match employee contributions to their retirement account up to a certain point.  That means you are doubling your money from the second it gets put towards retirement.  This is an excellent opportunity that all couples should look to utilize.
  4. Pay Off High Interest Student Debt and Credit Cards – If you are paying 10% or more on any of your debts, you are taking a beating.  The sooner you can stop this bleeding the better.  Debt of this nature should be paid off aggressively.  If you are just making the minimum payments, lenders will be making out like bandits.
  5. Tax Advantaged Retirement Accounts – Even if your employer doesn’t match, contributing to a tax advantage retirement account, like an IRA or a 401(k) can be an excellent opportunity.  Couples can put money in certain accounts on a pre-tax basis… that means they don’t pay any taxes on the money until it gets withdrawn in retirement.  A basic stock market fund or target date retirement fund can usually be expected to earn 7-9% each year.  Some years will be much better, some years will be much worse, but on average, money will grow faster in a retirement account than it will paying down a student loan at 4 or 5% interest.
  6. Medium Interest Student Debt – If you have student loans in the 4-6% range, they should be targeted for aggressive repayment once the couple has maxed out their retirement contributions.
  7. Investment Accounts – Setting aside money in an investment account is a great way to make retirement happen as early as possible.  Even without tax advantages, this form of saving can be a huge asset for retirement.
  8. Low Interest Student Debt – Right now student loan refinance companies are offering rates below 3%.  If you are lucky enough to have a student loan interest rate this low, you could be better off just paying the minimum and investing the money rather than paying down the debt.  If you are earning 5% on your money and only spending 3% on the interest, you come out ahead.  There are risks to this approach for sure, but for the couple with student debt who prioritizes retirement, it can be a smart move.

The one thing that can throw these priorities out the door is trying to buy a house…

Buying A House

Buying a house is the wildcard that can affect every financial decision a couple makes for years.

Mortgage companies are mostly concerned with a couple’s monthly bills.  Setting aside money for retirement is a great choice and responsible financial decision, but it doesn’t necessarily help a couple buy a house.

When buying a home, there are several variables to consider:

  • Debt-to-Income Ratio – Credit scores are often listed as the big concern people have when buying a home, but the Debt-to-income ratio is just as important.  Lenders look at the amount of money a couple earns each month and compares it to the monthly bills on their credit report.  Car payments, credit card bills, and student loans are all factors.  Large student loan payments are often the reason student loan borrowers struggle to buy a home.
  • Down Payment – Traditionally, the expected down payment on a home purchase was 20%.  Today, the average down payment is 5%, with some couples putting down even less.  However, for many couples, finding the money for even a small down payment can be a challenge.

Fortunately, there are a few tricks that can be utilized to help make homeownership a reality sooner rather than later.

  • New Homeowner Programs – These opportunities vary greatly from state to state and even from community to community.  Be sure to research potential new homeowner assistance programs in your area.  Real estate agents and mortgage brokers can be good sources to consult, but be sure to do your own investigation as well.
  • Student Loan Refinancing – Traditionally, student loan refinancing is used to get a lower interest rate on student loans.  For couples looking to buy a house, it can also be used to secure lower monthly payments.  If you have loans on a ten-year repayment plan and refinance to a lender offering a 20-year repayment term, monthly payments can be reduced significantly.  Lower student loan payments mean an improved debt-to-income ratio and better odds of an approval for the amount you want to borrow.  However, this trick does come with risks:
    • If you refinance right before you apply for a mortgage it can make the process a mess, it is best to refinance at least 6 months to a year in advance.
    • After purchasing a home, it might be desirable to pick a shorter repayment length for a lower interest rate.  While borrowers are allowed to refinance multiple times, rate offerings may have changed and a better deal may not be available in the future.
  • Knock Out Small Balances First – From a wealth building perspective, there isn’t much of a point to aggressively paying off a low interest student loan.  However, from a home buying perspective, it can be.  By paying a loan off in full, a payment drops off your credit report and improves your Debt-to-income ratio.  Simply paying down a large balance, while financially sound, doesn’t lower the monthly minimum payment and doesn’t help your DTI ratio.

Pay for a Wedding or Pay Down Student Debt?

Any couple with large amounts of student debt should think twice before spending a bunch of money on a lavish wedding.

Surprisingly, the average wedding cost and the average student debt at graduation are both around $35,000.

This means couples should carefully consider the opportunity cost of their wedding.  If the big wedding means living with student debt for the next decade plus, is it worth it?

Clearly, this analysis will be different for every couple.  Priorities can vary greatly from one couple to the next.  Regardless, student debt should be a consideration when wedding planning.  Ignoring the realities of student loans could be a regrettable decision.

Should My Husband or Wife Cosign Any Loans?

Having your spouse cosign for student loans or student loan refinancing is usually not advisable.  There are two reasons for cosigning should be avoided.

First, it could make future credit decisions more difficult.  Most credit decisions are done automatically by a computer.  If a couple applies for credit to buy a car or a house, it is possible that the cosigned loan will be counted twice.  Creating this double obligation to pay down the debt should be avoided.

Second, cosigned loans can be a major problem in the event of a divorce.  Getting divorced does not relieve an individual of any financial obligations from other loan contracts.  To say it makes things messy would be an understatement.

Who gets the student loans in a divorce?

Dealing with student loans in a divorce is tricky.

Before jumping into the details, it is important to note that the rules regarding divorce vary from state to state.  The rules in Indiana are very different than the rules in Indiana.

That being said, there is an important concept that couples should understand.

First, how the loans are handled in the divorce proceeding really doesn’t affect lenders.  Suppose the terms of the divorce require that wife pay off one of husband’s student loans in return for the wife getting to keep the house.  As far as the lender is concerned, nothing is changed.  Husband is still contractually obligated to pay off the loan.  If nobody makes payments on the loan, the husband’s credit score will take and the lender will initiate collections proceedings.  If all this happens, the husband could sue his ex-wife for her failure to pay, but he isn’t received of his contractual duty to the lender.

In short, getting divorced can create more student loan responsibilities, but it can’t make any student loan responsibilities go away.

Maintaining an Emergency Fund

Many financial experts suggest that individuals keep, 3 to 6 months worth of expenses in an emergency fund.  Some even suggest up to a year.  For couples with student loan debt, this can potentially mean a lot of money sitting in a savings account earning very little interest.

The good news for most married couples is that they can often get away with a shorter emergency fund than single individuals.  If a single person loses their job, 100% of their income is gone until they find a new job.  For a couple, losing an income hurts, but there is still money coming in.  If you and your spouse each earn enough to independently pay the bills for the month, it reduces the need for a large emergency fund.

Ultimately, emergency fund planning should be based upon how long it will take you to find a new job.  If you lose your job today, and have a rough time in the job market, how long will it be before you can replace your income?

At minimum, an emergency fund should include enough money to pay the deductible on any medical bills or to pay an unexpected car or home expense.

Couples, even those with large student debts, can get away with a smaller emergency fund, but they should still have one in place.

Final Thoughts

Student loans can have a huge impact on many dynamics of a relationship and a marriage.

The key to making sure student loans don’t ruin a relationship is to understand the consequences and to have a plan in place.