Whether a couple files their taxes jointly or separately can have a massive influence on their student loan payments.
If you are on an income-driven student loan repayment plan, such IBR, PAYE, or SAVE, how you file your taxes will change your monthly payments. File jointly, and your spouse’s income affects how much you pay.
Today we will look at the advantages of filing separately and cover the many reasons why filing separately isn’t an easy decision.
What is the advantage of filing separately?
Federal student loans come with a variety of income-driven repayment (IDR) plans. The IDR plans allow borrowers to make payments based upon what they can afford rather than what they owe.
In the case of married couples, the government will count the income of both spouses when determining how much a couple can afford to pay for their student loans.
One way to avoid counting spousal income for IDR payment calculations is to file taxes separately. By filing taxes as married filing separately, spousal income isn’t factored into the IDR calculations, except in a few circumstances detailed below.
What if we both have student loans?
Many couples fear that if they file jointly, their student loan payments will double. This is not accurate.
However, even if you both have student loans, it is possible that the payment will go up by filing jointly. Thus, you should still follow the steps described below to compare options.
For those curious, this article breaks down the ways IBR and PAYE payments are calculated for couples who both have federal student loans.
Do your taxes… twice
The question of filing jointly or separately does not have a simple answer, and the results can vary from one couple to the next. Enter math.
The major benefit of filing separately is that you end up with lower student loan payments. However, those lower payments come at a cost. That cost is in the form of higher taxes.
In the past, this cost was attributed to a change in tax brackets as there was a clear penalty for filing separately. Recent changes to the tax code have reduced or eliminated this particular penalty for most taxpayers.
Even though the tax bracket issue is much less of a problem, filing separately is still likely to be the expensive alternative. The only way to know how much is to do the math. Prepare a joint return, and then two individual returns. The cost of filing separately is the extra taxes that you will have to pay on those two individual returns.
Why is filing separately more expensive?
Filing separately means that a couple is no longer able to claim many popular tax deductions and credits.
Common tax credits lost by filing separately include:
- Earned Income Tax Credit
- American Opportunity and Lifetime Learning Education Tax Credits
- Exclusion or credit for adoption expenses
- Child and Dependent Care Tax Credit
Most noteworthy for student loan borrowers is that the student loan interest deduction is lost by filing separately.
Couples that wish to deduct the student loan interest must file jointly.
Consider your repayment options
The Department of Education makes this step pretty easy. They have created this wonderful tool called the repayment estimator. Using this resource, you can find out what your student loan payments would be in a variety of circumstances.
Use the repayment estimator to figure out your monthly payments if you file separately and your monthly payments if you file jointly. If you have any questions about plan choices or monthly payments, be sure to call your servicer so that you understand all of the options and limitations.
When you look at the repayment plan options, keep in mind that filing separately only helps borrowers who are signed up for the IBR (Income-Based Repayment) plan or the PAYE (Pay As You Earn) plan. IBR limits your student loan payment to 15% of your discretionary income, while PAYE limits your student loan payment to 10% of your discretionary income. PAYE is better than IBR, but if you have student loans from before October 2007, you are not eligible for PAYE.
Filing Separately on REPAYE and SAVE
Originally, borrowers on the REPAYE plan didn’t have the option of filing separately to exclude spousal income.
When REPAYE was overhauled to eventually become SAVE, this limitation was removed. Borrowers on REPAYE and SAVE can file taxes separately to exclude their spouse’s income from payment calculations.
If you see articles stating that REPAYE always includes spousal information, you are likely looking at outdated information.
Keep an eye on capitalized interest
If your monthly payments on IBR or PAYE are less than the monthly interest that accrues each month, you should also give some thought to capitalized interest.
When your loan balance is growing because your monthly payments are less than the interest, your servicer is tracking the extra money each month. It isn’t immediately added to your principal loan balance. Instead, they just keep a running tally of this additional money you owe. By not adding it to your principal balance, you avoid paying interest on that interest.
Switching repayment plans can cause the accrued interest to be “capitalized,” meaning it gets added to your principal balance. When you have interest capitalization, your balance goes up, and your monthly interest payment also goes up.
The best way to deal with a growing balance situation is to sign up for the new REPAYE/SAVE plan. There is a new subsidy that will cover 100% of that monthly unpaid interest. It prevents loan balances from spiraling out of control.
An Important Reminder
The decision isn’t quite as simple as just picking the option that costs less money. It is also essential to consider how this decision fits in with your overall student loan plan and tax strategy.
Remember: student loan debt is money owed to the federal government. Getting lower payments does not mean you will owe the government less. In fact, the opposite is true. The less you pay now, means more interest will accumulate, and you will pay more in the long run.
However, if you are certain you will be qualifying for loan forgiveness, the decision is then just a simple comparison of which option saves you the most money for the next year.
Because student loan forgiveness is a variable, if the numbers are close, it might make more sense to opt for the higher student loan payment. This route keeps taxes lower and reduces a debt that may have to be paid in full.
Filing Separately in Community Property States
Borrowers that live in a community property state will have an extra layer of complication.
The following states have community property rules: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
In community property states, couples that file separately must each report half of all community income on their tax return.
Community property is defined as property that you, your spouse, or both acquire:
- During your marriage
- While you and your spouse are living in a community property state
This strange income reporting rule can lead to some odd outcomes when doing the math on the best way to file. This site has previously taken an in-depth look at how couples in community property states might have to adjust their repayment strategy.
Should Student Loan Borrowers File Jointly or Separately?
On the surface, the decision to file jointly or separately is one of just picking the option that costs less. In many cases, it comes down to just doing the math and picking the less expensive choice.
However, it can be beneficial to think not just about next year, but the next 10 or 20 years, when you make this decision. Concepts like student loan forgiveness and capitalized interest can potentially sway your decision.
If you feel overwhelmed about your choices, this might be a situation where you do all the research you can, think about your future plans, and then discuss things with a financial planner or an accountant.
Im on the REPAYE plan right now but I hear that it will changing and allowing us to file Married but filing separate. I was going to change to the IBR plan until i heard about the change. But if it doesn’t happen, can I change to an IBR plan mid year, which does recognize married filing separate, or will they count part of the year under the REPAYE plan? I guess what I’m trying to say is that how do they calculate what you owe if part of the year the plan didn’t recognize married but filing separate.
Lots of great questions here, Michelle.
Let’s start by answering the easy ones first. You can change repayment plans at any time. If you changed plans six-months ago, you can still switch to a new plan that better suits your needs. Likewise, if you have a change in income, you can request that your monthly payment be recalculated immediately.
Now for the tricky question. We don’t know what the new REPAYE plan will look like… or even if it will change the current REPAYE plan. Here are the details on the proposed new plan that I’ve been able to identify. However, all of this is subject to change. Its great to know about changes that could be on the horizon, but I’d caution you not to make any conclusions until things are finalized.
Thank you so much Michael. I have a couple of other questions. Would you recommend waiting until I need to re-certify in August of 2024, or changing plans now? I’d like to wait just in case the REPAYE does change in the meantime, and then I won’t need to change plans because it will respect my married but filing separately status. My concern is if the REPAYE doesn’t change, and I need to change, I read somewhere that we should change plans BEFORE an increase in a salary, because the second the salary increases, the loan board will back date higher payments. I’m worried because I was married in June of 2022 so if I wait until next year to change plans when I re-certify will they increase my payments based on the date of my marriage? Or can I wait until aug 2024 to change?
Also, my other question is a little different. Who can we contact to get more information about loan servicers from more than 20 years ago? I’m trying to get an accurate account of all of my payments as I think I have make almost 25 years of payments but my present loan servicer only has loans from 2003. I contact the Dept of education but they redirected me to my current servicer, who directed me back to them 🙁
Hi Michelle,
You can change plans whenever you want, and you can also have your payments recalculated if you experience a drop in income. However, I don’t recommend waiting to recertify in anticipation of the new repayment plan.
As for the payment history. I had simimilar issues with my servicer. You can try to arrange a three-way call with the Department of Education and the servicer, but ultimately, the servicer should have the full records, including the time before they serviced your loans. If you continue to have issues, you can always file a complaint.
Thanks again Michael. I know my question sounded a little confusing but what I was really wondering was related to my recertification in August 2024. If I switch from the repaye right now to the IBR plan, I will be making higher payments. But if I wait until August 2024 then between now and August 2024 I think my payments will be lower, regardless as to whether the plan the changes. Is that correct thinking? When August 2024 rolls around I will have been married two years but filing married but separately. Can I switch to IBR in august without penalty or will they make me pay retroactively since the prior year I was under REPAYE that didn’t honor married but filing separately. If so then it’s better for me to switch now even if I have to pay more between now and August 2024 because I be our plan has a higher payment percentage than the repaye? I realize that it seems like I’m talking in circles I’m just trying to understand the best course of action. Right now I am on the repay evil plan that does not honor married but filing taxes separately. But my recertification doesn’t come up until next August so I don’t know if I need to change that plan right away because I’m on a plan that does not honor married but filing separately and just start paying more on the IBR plan. I would hate to recertify in August 2024, change to IBR then, and have them look at it and say “wow for the last year you’ve been on the repaye plan and they actually don’t honor married but filing separately and now you owe us a ton of money from the prior year.”
And again, I really appreciate your help on this.
Michelle,
They won’t see that you changed plans an then retroactively bill you at a higher rate based on what you would have been paying on a different plan.
Hello Michael!
Thanks for all the valuable information.
Do you happen to know a CPA who is familiar with married filing separately and student loans in community property states? I am looking for one and can’t seem to find one who isn’t already booked up.
Thanks!
Great question Phillip.
I don’t know of any. However, you can still have your tax preparer give you a number for filing jointly and filing separately. Once you have those numbers you can compare the cost of filing separately against the potential savings.
Do you happen to know if anyone who does consulting with student loan situations?
When borrowers want individualized guidance based on their finances, I sometimes refer people to the Student Loan Planner for individual loan consulting.
Good article. If an individual gets married, how does the marriage year typically get factored in given the following factors? 1) Pursuing PSLF so MFS makes a lot of sense even with the higher taxes, 2) Income for the year was originally submitted for a single tax payer but now have the option to file MFJ for marriage year, 3) plan to file MFS going forward, and 4) made Roth IRA contributions in the last years so if filing MFS in marriage year, will have to make an excess withdrawal.
You are right that filing separately can make a lot of sense when chasing after PSLF.
I’m not sure what you mean by “marriage year” when doing the income certification, they will just look at your most recent tax return.
Roth IRA contributions shouldn’t have an impact because they were made with after-tax income (meaning no change to AGI).
If I already have an IDR and my payment is based on MFJ, can I just go ahead and choose MFS for this years taxes – so when I recertify my income it will only be my income? Or is this a red flag?
What do you mean by a red flag?
Many borrowers switch from MFJ to MFS for the purposes of lowering their IDR payments.
If my daughter files separate from husband on Income Tax for IBR, how will this effect her Marriage Benefits for MarketPlace health insurance assistance. She was told must file together to receive insurance benefit
Great question Amanda. I really don’t know. There definitely could be consequences to filing separately beyond the higher tax bill to filing separately. Health insurance can vary greatly from state to state, so I’d suggest talking to someone local.