More married and engaged couples face a growing problem: student loan repayment.  The National Loan Forbearance and On-Ramp programs helped borrowers avoid monthly payments since 2020. As we enter the 2024 tax return season, these borrowers must now address their tax filing decision to avoid a significant increase in their loan repayment. Starting in March 2025, income recertification will restart for most borrowers. Many Income-Driven Repayment (IDR) amounts will use the 2024 income or tax return from this recalculation.  This year’s tax submission and planning are critical.

Money issues are the second most common reason for divorce.  Most married couples do not realize they could have over 126 loan repayment combinations to sort through.  For example, a married couple could save hundreds of dollars monthly in payment differences based on their tax filing status and student loan debt structure decisions.

Yes, I did say 126 different combinations!

Reason for Confusion

As more borrowers select the different Income-Driven Repayment (IDR) options, additional complexity is added to the repayment process.  Getting the right advice is difficult because the loan servicers can not discuss taxes, and most tax professionals do not understand Income-Driven Repayment (IDR) and Loan Forgiveness.

Student loan IDR methods do not follow traditional loan repayment methods.  IDR methods use Adjusted Gross Income as the primary factor in calculating a borrower’s or couple’s monthly payment.  Married couples need to analyze the married filing separately and married filing joint tax decisions more carefully.

To properly analyze their options, the couple must review how their taxes are filed, and their student debt is structured.  In the analysis, the borrower should include a projection of future income increases and future employment decisions, which may enhance future payments and allow forgiveness options.

These simple adjustments could net significant dollars.  The newly found money could go to additional retirement savings, a home purchase, starting a family, or providing additional payments toward student loans.

Student Loan Advice is Fragmented

The big reason for the confusion is the source of fragmented advice.  The three most common sources of advice for the borrower are the federal loan servicers, a tax advisor, and a refinancing company.  The objective of each advice provider is different.  As a result, their advice is not transparent to each other, and their recommendations rarely cross over.

The loan servicers try to keep the borrower current and usually recommend the lowest payment.  Their shortcoming is they cannot provide any personal financial advice, especially when filing your taxes as a couple.  The married filing, separate or joint, could be discussed, but they can only discuss each borrower individually.  The actual loan repayment calculation is different based on the tax filing submission.

The following source is the tax advisor.  Their primary goal is to lower your taxes.  In most cases, married filing separate vs. married filing joint will result in a higher tax bill.  This is the reason the tax professional will usually recommend filing jointly.  They do not see the impact on each spouse’s loan repayment options.  A simple change could save thousands of dollars in loan repayment payments.  It would offset the increase in taxes.

The last source is the private lenders or refinancing companies.  Their primary goal is to lend money and have you as the borrower, eventually becoming a customer.  This option could be a good decision in many cases, but you need to understand the options and consequences.  Once a borrower decides to refinance with a private lender, they can no longer use the federal loan repayment options.  It will also limit the couple’s tax filing options due to how the federal repayment calculations work for married couples.

Until now, this consolidated view was difficult to calculate.  The PayForED student loan repayment solution now organizes the information and options in one view. Here is a quick view of one of the reports found within the Student Loan Repayer:

Tax Filing Student Loan Repayment Analysis Chart

Importance of Loan Type

As stated earlier, a couple’s debt structure will impact how their federal loan repayment numbers will be calculated.  If both have federal student loans, the calculation for a couple filing married separately differs from if they file married jointly.

The couple files married and separate; their federal IDR loan repayment calculation will be based on each person’s income matched to their own federal debt.  For the couple filing married and joint, with both having federal loans, the monthly payment under the IDR method will be based on the percent of borrower federal debt to the joint income.  This is only applicable when both have federal loans.

This complexity results in many couples getting confused and not receiving the proper advice.  A couple having the proper debt structure decisions can work to their advantage. One spouse could select the IDR method and the other could select one of the fixed repayment options.  At the same time, filing their taxes married and joint to lower their tax bill could deliver the best of both worlds.

If one spouse has already refinanced their loans or does not have student loans, then the tax filing options will be limited since no federal loans can be considered.  As stated before, once a person refinances their federal loan to private loans, they cannot return to the federal loan repayment programs with those private loans.

Another factor to consider is the requirement for additional education.  Keeping your federal loans may be a better choice since it offers deferment while in school and could be consolidated in the future.

Life Changes Impact Loan Repayment Options

When is the best time to do this analysis?

We recommend that a student loan repayment analysis be done during a significant life event.  Future financial outcomes depend on getting the proper advice and analysis for each change.

An initial review should be considered for married couples who have filed their taxes together at least once to confirm they are doing the right thing.  Other everyday events include if one spouse has just completed a degree and will begin repayment shortly.  Other items would be changes in career, employer, or childbirth.

This analysis should happen for engaged or recently married couples before you file your taxes for the first time.  By pre-planning, you can avoid the stress and surprise of a significant increase in your IDR repayment.

Under the IDR methods, you must recertify your loans each year.  The recertification will use the most recent tax filing on record depending on your IDR Anniversary date.

Married Filing Separately Penalty

In most cases, the couple who submits their taxes as married filing separate will pay higher taxes.  There are a few reasons for this outcome.  If you file your taxes separately, you lose the student loan interest deduction and the income tax rate table is higher.  You could lose other deductions and credits.

The problem is that the tax advisor never sees the potential upside of your loan repayment options by filing your taxes separately.  This is especially important for those couples where one or both qualify for Public Student Loan Forgiveness (PSLF).  It is our theory, that due to this lack of knowledge and transparency, many people leave the PSLF program because of inadequate advice.  This will become more obvious with the case student and chart below.

If you depend on the Affordable Care Act for healthcare insurance then filing married and separate is not an option unless you are able to get health insurance through another source.

Couple’s Loan Repayment Case Study

Here is an example of how much a person’s repayment amount can change with a few simple tax filing and debt structure changes.  The chart below provides a summary of only three options.

This is a married couple who currently both have federal loans. Spouse 1 has just over $65K of federal student loans and has an income of $50K.  Spouse 2 qualified for Public Loan Forgiveness and has just over $97K of federal loans and an income of $60K.  Both contribute to their company’s retirement plan and have no children or a home.

To keep things simple, we are only going to analyze the changes in the Pay As You Earn (PAYE) method for Spouse 2.

A sample of Married Filing Separately with Student Loans

This chart aims to show you how a few simple decisions can change a couple’s student loan repayment amounts.   By just making combination changes in the tax filing status and the type of loans, the couple could have an additional $264 a month in cash flow for just this borrower.

In column 1, the couple files as married and joint, with both having federal loans.  In column 2 they still file married and joint, but Spouse 1 has refinanced their federal loans to a private student loan resulting in an increase of $264 per month for Spouse 2.  As a result of Spouse 1 refinancing, this couple will need to file married and separate, resulting in a monthly payment of $366 and a tax increase of $61 per month.

You can now see how complex these options are and why couples struggle to decide.

Impact of Community Property States on Loan Repayment

For couples who live in community property states, the advantage of filing separately could be a blessing or a curse.  This will depend on who has the higher income and who has the debt.

The community property states are:

• Arizona
• California (may apply to domestic partners)
• Idaho
• Louisiana
• Nevada (may apply to domestic partners
• New Mexico
• Texas
• Washington (may apply to domestic partners)
• Wisconsin

In these states, the income is split 50 – 50 on a tax return if they file married and separate.  This can be maximized when the person with higher debt has the highest income.  The higher-income person will get a net reduction, which reduces adjusted gross income and their monthly IDR payment.

Marriage Filing Decision Summary

This is not an easy decision for married couples with student loans.  Getting your taxes done by a tax professional as joint and separate filers is crucial.  Couples must understand and compare the tax differential to their student loan repayment options. These decisions become even more critical as your finances become more complex with home purchases and adding children.

With Income Recertification restart, your tax planning will be critical to future payments.   Depending on your IDR Income Anniversary date, the loan servicer may use your tax information on file.  A financial surprise could occur without proper planning since income recertification has not been required for five years.

As student loan repayment returns to a more stable environment and with the new IRS integration, borrowers must do better tax planning.  Having a discussion and a plan on money, specifically, student loans, may be a great idea. PayForED has a list of advisers trained in this area if additional help is needed.

Disclaimer: PayForED is not a tax consulting firm.  A tax advisor needs to review any of the above information since other tax items could impact your results.