Wedding invitations? Check. Marriage license? Check. See how tying the knot can affect your student loan payment… You probably didn’t see that one coming, did you?
Student loans may be one of the last things on your mind when you’re about to get married. But if you have federal loans, getting hitched could increase your monthly bill, depending on which repayment plan you’re enrolled in.
When it comes to federal student loans, there are two broad ways to repay: balance-based and income-based. Both of these options offer a variety of repayment plans to choose from.
With a balanced-based option, your payment amount is calculated by dividing how much you owe (including interest) by the length of the repayment term. So with the standard plan, for example, that’d be 10 years — or 120 payments. If you’re currently enrolled in one of these plans, you have nothing to worry about as marriage doesn’t change those payments.
But for some borrowers, those standard payments can be pretty steep. That’s when enrolling in an income-driven repayment plan comes in handy, and when you're relationship status matters.
In an income-driven repayment plan, your payment amount is determined by — you guessed it — how much you earn. Payments under these plans can be lower than through the default standard repayment, as they’re limited to between 10% and 20% of your discretionary income (aka how much you have left after paying taxes and reserving some money for typical basic living expenses.)
Out of the roughly 43 million borrowers with federal student loans, close to a third of those with Direct Loans are enrolled in an income-driven repayment plan. If you’re one of them, here’s how saying “I do” could impact how much you’ll pay each month.
How income-driven repayment is calculated when you’re married
If you have federal student loans, there are four income-driven repayment options to choose from: Revised Pay As You Earn, Pay as You Earn, Income-Based Repayment and Income-Contingent Repayment.
All four plans are designed to make payments more manageable by taking into account how much you earn and how many people depend on your income. Specifically, the government defines discretionary income for these plans based on the federal poverty line for your family size.
To verify that the income information provided is accurate, student loan servicers usually ask for a copy of your most recent tax return — and this is not a one-time thing.
Since income and family size is something that can change at any time, you must provide this information each year to stay in an income-driven repayment plan. You can also provide it any time you want your payments recalculated if there’s been a change in your circumstances.
Sophia Bera, the founder of Gen Y Planning, a firm that specializes in financial planning for millennials, says that although a lot of people wonder how getting married will affect their tax liability, they usually overlook the fact that their new tax situation can also increase their federal student loan payments.
“It’s not even on their radar,” Bera says.
When you get married, you can either file your taxes jointly or separately. Most people, especially those with kids, tend to file jointly, as it is simpler and typically more advantageous in terms of taking credits and deductions.
Filing jointly may be beneficial tax-wise, but it can backfire when it’s time to update your earnings for the income-driven repayment plan, as your loan servicer will take into account both you and your spouse’s income to determine your monthly payment.
Additionally, if you and your spouse both have federal student loans and file your taxes jointly, the servicer will also take into account your combined debt to calculate your new monthly payment. However, this doesn’t mean that your payments will be split equally.
Jill Desjean, a policy analyst at the National Association of Student Financial Aid Administrators (NASFAA), says that the servicer will calculate what percentage of the debt each spouse is responsible for to determine each of their payments.
For example, if the servicer determines that you and your spouse can pay up to $100 as a household, and you have 60% of the debt and your spouse has 40%, then your student loan payment will be $60 while your spouse’s payment will be $40.
If you choose to file taxes separately from your spouse, your servicer will only take into account your individual income to determine your monthly payment. The exception is if you’re in the Revised Pay As You Earn plan.
With that plan, regardless of how you file taxes, the servicer will always consider both of your incomes to determine your monthly payment, unless you certify that you are legally separated.
How marriage affects public service loan forgiveness
One of the benefits of having federal student loans over private loans is that you may be able to get a portion of your balance forgiven through the Department of Education’s Public Service Loan Forgiveness program.
Under this program, borrowers who work at a non-profit organization, government agency or another qualifying employer, are only required to pay their loans for 10 years, after which the remaining balance is forgiven.
“If you're banking on forgiveness, your goal is to pay as little as possible, so that you get the most forgiven,” Desjean says.
Since filing taxes jointly with your spouse can increase the amount you’re required to pay each month, Desjean says this will reduce the amount forgiven in the end. In other words, you won’t be able to take full advantage of this program the same way you would if you filed separately.
Should you file your taxes jointly or separately to lower your student loan payment?
Filing your taxes separately from your spouse might seem like a practical approach to lower your student loan payments. But Rus Garofalo, president and founder of Brass Taxes, a New York-based tax preparation company, says that the reality is much more complex than that.
“There are things as someone married filing separately that you can't take advantage of,” says Garofalo, referring to tax credits and deductions that married couples filing separately can’t claim since they aren’t giving the government their full financial picture.
One of the most common ones? The interest paid on student loans for the year.
If you’re married and filing jointly, you can deduct up to $2,500 worth of student loan interest from your taxable income. Other things you won’t be able to claim if you file separately include the Earned Income Tax Credit, Adoption Tax Credit and Lifetime Learning Credit. Additionally, your Child Tax Credit may also be reduced.
Because of this, Garofalo advises couples to consult with a CPA or their tax preparer to decide which is the best course of action, as your tax liability might increase to the point where you’re not actually saving any money by having a lower student loan payment.
If you want an estimate on how much your payments will increase should you decide to file jointly, you can always check the Department of Education’s repayment calculator to help you decide as well.