How Will Getting Married Impact My Student Loans?
Income-driven repayment plans can change once you're legally married and filing taxes jointly
About the author: Kevin Mahoney, CFP® is a fee-only financial advisor in Washington, D.C. Kevin's work with his clients focuses on paying off student loans, buying a house, investing savings, and budgeting. Kevin is the founder & CEO of Illumint, a virtual financial planning firm specifically designed to help couples and young families with their financial decisions.
Most Millennials who are in long-term relationships are well aware of the student loan debt that their partner has. These days, agreeing to share your life with another person often includes accepting the student loan repayments that person needs to make, whether you offer to assist or decide that the loans will remain your partner’s sole responsibility. Some couples, however, still overlook the impact that legal marriage can have on their student loan repayment plan. Income-driven repayment (IDR) plans, specifically, can change once you’re married and/or filling your taxes jointly.
Marriage & Income-Driven Repayment Plans
As Ian Foss explains on the U.S. Department of Education blog:
“Income-driven repayment plans generally set your student loan payment according to your adjusted gross income (AGI). What is your adjusted gross income? It’s a number from your federal income tax return. After you get married, you have the option to file your federal income tax return jointly with your spouse or separately from your spouse. When you file a joint federal income tax return, there’s just one adjusted gross income, based on the combined income of you and your spouse.”
He continues, “As a general rule:
If you file a joint federal income tax return with your spouse, we’re going to base your student loan payment on your joint income.
If you file a separate federal income tax return from your spouse, we’re going to base your student loan payment on your individual income.”
There’s one notable exception to this general rule, however. The Revised Pay As You Earn (REPAYE) repayment program bases payment on a couple combined adjusted gross income, regardless of whether the couple files taxes separately or jointly. Perhaps more than any other student loan repayment plan, REPAYE can have the most significant unintended consequences for a couple that doesn’t factor their student loans into their marriage plans.
Advantages & Disadvantages to Marriage For All Borrowers
All couples with student loan debt need to think through their options, though. Donna Rosato for Consumer Reports notes:
“Even if filing separately gives you a lower payment, it might not be worth it. If you choose to file your taxes individually, you’ll miss out on a host of tax credits and deductions that joint filers receive. They include the earned income tax credit, the American Opportunity Credit and Lifetime Learning Credit for higher education expenses, the student loan interest deduction, the adoption tax credit, and the child and dependent care tax credit.
If you are married and filing separately, you will also have less flexibility when it comes to tax strategies. You must both claim the standard deduction or must both itemize your deductions. A married person can’t use the standard deduction if his or her spouse is itemizing.”
Writing for The Motley Fool, Kailey Fralick adds:
“If [your partner] also has student loan debt, the increased household income will affect both parties' income-driven student loan payments, though the lower-earning spouse will see their payments rise more than the higher-earning spouse because of the greater increase in their discretionary income.”
In some cases, getting married can offer some student loan-related benefits. In the case of private student loans, Fralick notes:
“The government charges all student borrowers the same interest rate regardless of credit. So you're stuck with the interest rates you have on your federal student loans unless you consolidate them.
This isn't the case with private student loans. Lenders assess your credit history, income, and debt-to-income ratio to decide what to charge you. If you think you may qualify for a better rate down the road, you can refinance your student loan with a different private lender.
If one spouse has poor credit, a low income, or a high debt-to-income ratio, he or she may find it difficult to secure a good interest rate on a private student loan. But the other spouse may be able to help by cosigning the loan. They're essentially vouching for their spouse's ability to repay and they promise to step in and continue making the payments if the primary borrower is unable to.”
Magnify Money offers a helpful example, which we encourage you to read in full on their website, that “shows how a change in filing status can save on taxes but cost more on student loans.” The example concludes:
“We can use a student loan repayment estimator like the one provided by the office of Federal Student Aid to find out. Here’s what we get when we run the numbers and choose the Income-Based Repayment option, assuming they are new borrowers on or after July 1, 2014:
Filing jointly, Joe’s minimum required monthly student loan payment under a standard repayment plan would be $143, and Sally’s would be $571, for a total of $714 per month.
Filing separately, Joe’s minimum required monthly student loan payment would be $141, and Sally’s would be $474, for a total of $615 per month.
Over the course of a year, Joe and Sally would only save $1,188 on their student loan payments by filing separately. Even with the additional loan payments they would have to make, filing jointly would save them $712 more than filing separately.”
Student Loans in the Case of Divorce or Death
Repayment plan aside, each individual in the relationship may want to consider how the partner’s loan might affect them in case of death. Student loans that you bring into a relationship typically remain your responsibility alone. Regarding these loans, Susannah Snider wrote for U.S. News:
“All federal loans – and a number of private loans – contain a death discharge when the original borrower dies. In that case, widowed spouses know that the lender won't come after them or their estate seeking payments. Private loans without that clause can be a risk for borrowers' families and cosigners.”
However, state property rules, in the case of death or divorce, will guide whether you’re responsible for any money that a partner borrows while you’re married. In addition, any individual who co-signs a partner’s student loan is legally bound to repay that loan unless and until the lender agrees to release.