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.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.57% – 6.97%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.50% – 7.24%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|