The income-driven repayment plans (IBR/PAYE/REPAYE) are difficult to understand and navigate. Taking into account your federal and state tax filing status makes the process even trickier for married borrowers. This document reviews considerations for married federal student loan borrowers. Show During your IBR/PAYE/REPAYE application or yearly renewal (StudentLoans.gov), you will be asked if you are married and how you filed your most recent federal income taxes. The federal tax code offers several incentives for filing your taxes jointly and often reduces your household tax burden compared to filing separately. However, the income-driven repayment plans often incentivize filing separately, particularly IBR and PAYE. The benefit of filing separately depends on who holds the debt and the division of your household income. You will have to determine if the annual tax breaks received from filing jointly outweigh the long-term student loan repayment savings of filing separately. Consider your options annually and perform the cost-benefit analysis for each as your family, income, and tax details change. Additionally, regardless of how you file your taxes, you and your spouse can each claim a family size of at least two for your discretionary income calculation. Married Borrower Considerations:
Examples of Considerations for Married Borrowers Considering PAYE or REPAYE Example 1: Taxes filed jointly, both have federal Direct student loans Combined AGI = $100,000, reside in non-community property state, i.e. Illinois Spouse 1 federal loan debt = $100,000; Spouse 2 federal loan debt = $200,000
Discretionary Income=$100,000 – (1.5 × 16,910) = $74,635 Your monthly payment due under PAYE is 10% of your Discretionary Income divided by twelve: Total PAYE or REPAYE payment = 0.10 × $74,635 = $7,464 per year or $7,464 ÷ 12 = $622 per month
Example 2: Taxes filed jointly, one spouse has federal Direct student loans Combined AGI = $100,000, reside in non-community property state, i.e. Ohio Spouse 1 federal loan debt = $100,000; Spouse 2 has no federal student debt
Example 3: Taxes filed separately, both have federal Direct student loans Spouse 1 AGI = $30,000; Spouse 2 AGI = $70,000, reside in non-community property state, i.e. New York Spouse 1 federal loan debt = $200,000; Spouse 2 federal loan debt = $100,000
Discretionary Income, Spouse 1 (PAYE) = $30,000 – (1.5 × 16,910) = $4,635 The monthly payment due under PAYE for each borrower is 10% of their Discretionary Income divided by twelve: PAYE payment, Spouse 1 = 0.10 × $4,635 = $464 per year or $39 per month *** Notice the difference in loan repayments compared to Example 1 ***
The monthly payment due under REPAYE is 10% of their combined Discretionary Income divided by twelve: REPAYE payment = 0.10 × $74,635 = $7,464 per year or $7,464 ÷ 12 = $622 per month
Example 4: Taxes filed separately, one spouse has federal Direct student loans Spouse 1 AGI = $70,000; Spouse 2 AGI = $80,000, reside in non-community property state, i.e. Florida Spouse 1 federal loan debt = $200,000; Spouse 2 has no federal loan debt
Discretionary Income, Spouse 1 (PAYE) = $70,000 – (1.5 × 16,910) = $44,635 Your monthly payment due under PAYE or REPAYE is 10% of your Discretionary Income divided by twelve: PAYE payment, Spouse 1 (PAYE) = 0.10 × $44,635 = $4,464 per year or $372 per month *** Note the difference in monthly payment depending on how you file your taxes and/or which repayment plan is used ***
Community Property States In some states, you effectively divide your combined incomes equally no matter how you file your federal income taxes. Fear not. Your loan servicer may still allow you to consider only your income in a community property state by providing alternative documentation of your individual income. Before you provide that, check with your loan servicer to see if this option is available. Here is how you may be able to utilize IBR/PAYE as a married borrower, filing separately in a community property state:
Key Takeaways
Does incomeThe laws and regulations for income-driven repayment (IDR) plans require payments to be calculated based on a combined household income, including your spouse's income if you are married.
Do you have to consolidate for incomeUnlike income-contingent repayment, which is available only in the Direct Loan program, income-based repayment is available in both the Direct Loan program and the federally-guaranteed student loan program, and loan consolidation is not required.
What are the cons of an income driven repayment plan?Income-driven repayment disadvantages. You'll pay more interest over time. Income-driven plans extend your repayment term from the standard 10 years to 20 or 25 years. ... . You'll pay taxes on the forgiven balance. ... . Your spouse's income could factor into your payment amount.. Are income driven repayment plans forgiven after 10 years?If you're making payments under an income-driven repayment plan and also working toward loan forgiveness under the Public Service Loan Forgiveness (PSLF) Program, you may qualify for forgiveness of any remaining loan balance after you've made 10 years of qualifying payments, instead of 20 or 25 years.
|