Income-driven repayment plans can help student loan borrowers better manage their payments. These programs offer a good option if you carry a lot of debt from school, but don’t earn enough money to reasonably afford to repay those loan balances.
If you’re single, an income-driven repayment plan — and the paperwork you need to submit to enroll in the plan — is pretty straightforward. You need to share some basic personal information about yourself and your finances.
But things get complicated if you want to take advantage of an income-driven repayment plan when you’re married. Depending on how you file your taxes, your spouse’s income may or may not impact your repayment plan.
You need to decide how you’ll file your taxes to make the most of repayment programs if that’s your financial priority. You also need to know what kind of paperwork and documentation to submit when you apply for a program if you’re married (and how that may change if you get divorced).
Marital status impacts your income-driven repayment plan
Income-driven repayment plans look at your total household income when determining what your monthly student loan payment will be. When you’re single, your household income is likely just your paycheck.
But when you get married, you probably add a source of income to your household thanks to what your spouse earns. This is good news for your finances, but increasing your total income can mean increasing your student loan payment, too.
Income-driven repayment uses your tax return to see what your household income is. Because of this, you and your spouse need to decide how you’ll file your taxes.
Filing jointly means your total household income — generated by both you and your spouse — is taken into consideration by an income-driven plan. Your income will be higher, and in turn, your student loan payment will likely be higher to match.
However, “married filing separately can substantially lower your loan payment,” explains Mark Struthers, a CFA and CFP who founded Sona Financial. “Your household size stays the same but your income goes down when they calculate discretionary income.”
Should you file separately to get a lower monthly payment?
It may seem like the obvious step is to check the “married filing separately” box on your next tax return. That can get you a lower required payment on your student loan balance each month, but it comes with downsides.
“You can give up a lot if you are married filing separately, like IRA income limits,” says Struthers. You can also lose access to a number of important tax breaks and credits. These include the child and dependent care tax credit, the earned income credit, the deduction of net capital losses, and more.
You also lose the ability to claim the student loan interest tax deduction, so filing separately in the name of prioritizing your debt may not make sense.
There’s no one right answer as to whether you should file jointly or separately when you’re married and on an income-driven repayment plan. You need to look at a number of factors, including:
- Your income, your spouse’s income, and your total household earnings
- Your current student loan payment
- What your student loan payment would be on income-driven repayment if you file your taxes jointly
- What your loan payment would be if you filed separately and enrolled in income-driven repayment
- The value of tax benefits and credits you enjoy if you file jointly, and how much you would miss out on if you file separately
There are a lot of numbers to review and consider. The best solution for you depends on what the math says. Does it make more sense for you to enjoy the tax credits you get when you file jointly, even if it means a higher student loan payment?
Or does it work better for your financial situation to lower your student loan payments as much as possible, even if that means missing out on tax benefits because you filed separately from your spouse?
This is a complicated situation where you may benefit from talking to a professional. Seek out a CPA to help determine if filing separately will cost you more in taxes than it would save you on your income-driven repayment plan.
Changes to the income-driven repayment request form
Regardless of what tax filing status you choose, you’ll need to submit a lot of information to the Department of Education to apply for income-driven repayment.
Recently, the government approved changes to the request form that you need to fill out if you want to use an income-driven repayment plan. They added the newer REPAYE plan and made changes to help borrowers more accurately complete the form.
They also now require married borrowers to share proof of their spouse’s income. This is designed to benefit you — if your marital status and household income disqualify you from a traditional income-driven repayment plan, you may still qualify for the newer REPAYE plan.
Dealing with divorce and student loan repayment
Getting divorced doesn’t disqualify you from an income-driven repayment plan, but it does impact the information that the government uses to calculate your monthly payment amount.
When you get divorced, your household size will likely change. If you filed jointly with your spouse, you’ll now file as single — which may change your official household income, too.
“If you are getting divorced, the decreased family size will increase your discretionary income,” explains Struthers. “But that increase may be offset by the decrease in your Adjusted Gross Income.”
Regardless of what the changes actually are, you will need to share the updates on the request form. However, don’t feel like you need to make those updates the day after your divorce.
“You only have to certify once a year. If it is not in your best interest, I would not volunteer any information mid-year,” advises Struthers. “You don’t have to.”
Figuring out your finances is no easy task when you’re recently married or divorced. Taking the time to consult with a tax professional can save you money and keep you on track to pay off your student loans.
Learn more about applying for an income-driven repayment plan here.
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