Avoiding Surprises: How Marriage and Tax Filing Status Impacts your Federal Student Loans

February 1, 2020

It’s everyone’s favorite time of year – tax time! Federal student loan debt is odd in the sense that tax filing status matters if you’re on an income-driven repayment plan. How you may ask? If you’re on ANY income-driven plan with your federal student loans and you are married, your spouse’s income can directly affect your monthly payment amount. And that can have massive implications on your monthly budget.

If you file taxes jointly, your payment will be based on both you AND your spouse’s adjusted gross income. If you file taxes separately, depending on what IDR plan you are on, you may exclude your spouse’s income from your payment calculation.

So let’s discuss the common questions around tax filing status and how that can impact how you approach to repaying your student loans.

What if BOTH spouses have outstanding federal student loans?

More often than not, it makes sense to file your taxes jointly. If both spouses have student loan debt there is little benefit to filing separately. Your payments on those loans likely wouldn’t change much. There is still an impact, however, on how your payments will be applied based on your joint income and your payment proportions. 

If you decide to file jointly, your debt as a household balance will be looked at and your payment will be weighted specifically to the proportion of your household balance. For example:

Spouse 1 balance:$153,507= 80.68% of household student loan debt
Spouse 2 balance:$36,754= 19.32% of household student loan debt
Total Household Balance:$190,261= 100% of household student loan debt

Then when calculating your payments, apply your proportionate % to your total household payment:

Joint Adjusted Gross Income (AGI): $138,762
Subtract HS Poverty Line x 1.5:– $25,365
Household Discretionary Income:= $113,397

Knowing your total household balance and household discretionary income will then allow you both to calculate what your payments would be under REPAYE. Since Spouse 2 has a lower total student loan balance, their payment calculation is lower than Spouse 1’s:

  • Spouse 1 payment calculation: ($113,297 x 10% / 12) x 80.68% = $762/month
  • Spouse 2 payment calculation: ($113,397 x 10% / 12) x 19.32% = $182.57/month

What if just one spouse has federal student loans?

The outcome is similar. If you file taxes jointly, your payment will be calculated based on both incomes. But this is where issues can crop up that can cost you money. Filing jointly can be a problem in this scenario when:

  1. Your spouse who does NOT have student loans makes a similar income or if they make more money annually (this will double or more than double your payment) and you (and your spouse) cannot afford a higher monthly payment.
  2. You both plan to keep your finances separate for the foreseeable future.
  3. You are on track for PSLF or private-sector forgiveness and your timeline may be thrown off by a higher required monthly payment.

If any of the above statements fit your situation, it may make sense to consider filing your taxes separately. Since the tax filing season is around the corner… it is important to look into this now, BEFORE you file since you’d have to wait until next tax-filing year to make this change again.

It is important to test out different filing status scenarios

You can learn a lot by running “stress tests” in order to see what your payment would look like under both scenarios in order to find the crossover point. There are, of course, benefits to filing jointly as a married couple. It’s important to make sure that the benefits of filing separately outweigh the “costs” that you’ll incur – namely paying more taxes.

SO, let’s get started with some number crunching :). This chart shows how each repayment plan calculates your monthly payment:

Note: If you are on REPAYE, the payment calculation is based off of joint income REGARDLESS of how you file. You would need to consider switching repayment plans to avoid having spousal income factored in.
Note: Your AGI can be found on the 2nd page of your most recently filed tax return (line 7 on your 1040). Add your new spouse’s AGI from the last tax year to yours to get an idea of what your Married-Filing-Joint AGI may look like.

You can also run these numbers on this repayment estimator on the Federal Student Aid site.

When looking for the crossover point there’s one thing that you specifically want to know. Is how much you save annually on your student loan payments GREATER THAN the negative tax difference you can expect when filing separately? To answer this question you will have to also run your taxes (or ask your CPA to do it) both ways to see the monetary difference. Here are a few things you could be giving up if you decide to file separately:

  • The education credits or student loan interest deduction of $2,500 (may not be applicable anyways if you make $140k – $160k of Modified Adjusted Gross Income as a married couple)
  • More advantageous tax brackets
  • The Child and Dependent Care Credit
  • The Earned Income Tax Credit
  • The exclusion or credit for adoption expenses
  • Generally being able to contribute to a Roth IRA
  • If one spouse itemizes, the other cannot take the standard deduction

With that said, there can still be circumstances where it makes sense to file separately because you exceed that crossover point. Let’s take a recent case as an example:

  • Current Plan: IBR (15% discretionary income, able to keep payment based on own income if filing taxes separate)
  • Spouse 1 Adjusted Gross Income: $53,720
  • Spouse 2 (No student loans) Adjusted Gross Income: $100,000

This was their first time filing taxes as a married couple – they wanted to know how filing taxes joint vs. separate would impact their student loan payment when spouse 1 had to recertify income later this year. Spouse 2 has no federal student loans. If they had simply filled out the IDR application continuing with the same repayment plan (IBR) and filing status, Spouse 1’s payment would have increased to $1,604/month next time they recertified their income. 

JOINT AGI (adjusted gross income): $153,720
Subtract HS Poverty Line x 1.5:– $25,365
Household Discretionary Income:= $128,355
  • Spouse 1 payment calculation filing JOINT: IBR ($128,355 x 15% / 12) = $1604/month

If they were to file separately, the payment would be based solely on Spouse 1’s income, and their payment would be $354/mo. That’s a $1,250/mo swing!

Spouse 1 AGI (adjusted gross income): $53,720
Subtract HS Poverty Line x 1.5:– $25,365
Household Discretionary Income:= $38,355
  • Spouse 1 payment calculation filing Separate: IBR ($38,355 x 15% / 12) = $354/month

The crossover point, or the tax cost for filing separately compared to jointly, would need to exceed $15,000 (($1604 – $354) x 12) for them to considering filing separately. 

Getting guidance on tax filing status for student loan payment impact

Marriage certainly impacts your federal student loan debt BUT filing taxes separately can be a way to alleviate any negative impact on your payment. Everyone’s financial situation is different and specific. And depending on how much money you owe and what repayment plan you are in, making a mistake in filing status could potentially cost you thousands of dollars.

If you are working in a woodshop you’ll be told to measure twice and cut once. The same goes for making changes to your tax filing status in order to lower your student loan payment. Run the numbers and then double-check them. If you aren’t sure how to proceed, speak to a CSLP® and a CPA. Their input can give you peace of mind and also help you keep more money in your pocket.

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3 comments on “Avoiding Surprises: How Marriage and Tax Filing Status Impacts your Federal Student Loans

  1. Chelsea S May 8, 2020

    This was such a helpful read! My partner and I are getting married in a few months, and I’ve been curious about how our filing status might change student loan repayment options. We will definitely be testing out different filing status options to see what works best. Thank you for the info!

  2. Jonathan Nichols Jan 25, 2021

    This is really helpful. If a borrower is on an REPAYE going for forgiveness, are there ever instances when when that borrower cannot switch to IBR (they have some pre 2007 loans) once they are married? For instances, what if that borrower’s income has gone up? Is the only factor whether the borrower could still have the hardship to qualify for IBR?

    • Thank you!
      If your payment calculation on IBR would be higher than the standard 10yr plan (paying the loans off in 10yrs), then you do not have a “financial hardship” and are ineligible/cannot switch to IBR from a different plan. REPAYE does not have this income/financial hardship requirement.

      If you were on IBR already and your payment got higher than the Standard 10yr payment, your payment would be “capped” at that amount (they can’t kick you off the plan once you’re already on it).