Many couples fear that their student loan payments will double if they get married. This is not the case.

Your payments will almost certainly change if you get married, but the change depends upon several details.

A Note from the Sherpa: This article was initially written in the early days of this site. It has since been updated numerous times to include up-to-date information, including the new SAVE plan.

The Rules for Couples on Income-Driven Repayment Plans

I usually don’t like to dwell on the research that goes into each article, but given that there is so much contradictory information on this topic, it is probably prudent.

Like any student loan issue, it starts with a call to the student loan servicer. When I asked about how marriage would affect my student loan payment, I proposed the following hypothetical. Suppose my spouse and I each make $40,000 per year, both have student loans, and both are on IBR. Will our payments be the same as two single people making $40,000 per year, or will they be double? I was told confidently (and incorrectly) that our payments would be doubled.

Because I was reasonably confident that the provided information was incorrect, I politely went through several other hypotheticals with my lender. Eventually, the customer service representative changed her answer. She explained that if we both were on IBR before marriage and got married, our total payments should remain the same. She based this response on the Income-Driven Repayment application form. This particularly clever customer service representative noticed that you could submit information about your spouse’s federal student debt. They wouldn’t ask for this information if it didn’t count. Thus, she concluded that her initial answer was wrong and that payments would not double if two IBR borrowers got married.

Not fully satisfied with this answer, I turned to Google for further help based on the information from my lender. A bit of legal research followed. Eventually, I found the definitive answer in the Code of Federal Regulations, specifically, 34 CFR 685.221(b)(2)(ii), which states that when calculating IBR payments:

The Secretary adjusts the calculated monthly payment if—Both the borrower and borrower’s spouse have eligible loans and filed a joint Federal tax return, in which case the Secretary determines—

(A) Each borrower’s percentage of the couple’s total eligible loan debt;
(B) The adjusted monthly payment for each borrower by multiplying the calculated payment by the percentage determined in paragraph (b)(2)(ii)(A) of this section; and
(C) If the borrower’s loans are held by multiple holders, the borrower’s adjusted monthly Direct Loan payment by multiplying the payment determined in paragraph (b)(2)(ii)(B) of this section by the percentage of the total outstanding principal amount of the borrower’s eligible loans that are Direct Loans;

Similar language for PAYE can be found at 34 CFR § 685.209(a)(2)(ii)(B).

This legal jargon basically says that the total IDR payment is calculated for the couple. Individual payments are then based on the portion of the debt in the name of that particular spouse. So if your spouse has twice the student debt you do, if you both are on the same IDR plan, her payment will be double yours.

Calculating Monthly Payments

One of the best tools for calculating monthly payments is the Department of Education’s Loan Simulator. Couples can add both their incomes and student loans to get an accurate projection of monthly payments.

For those who want to understand how the calculations are made, the Department of Education is first looking at the combined adjusted gross income (AGI) of the couple from their most recent tax return. From that number, the Department will calculate the discretionary income of the couple. Depending upon the Income-Driven Repayment plan selected, the couple will be responsible for paying 10, 15, or 20% of their discretionary income towards their federal student debt. (Up to this point, the process for single individuals and couples is the same.)

When couples both have federal student loans, the payment is split proportionally to how much each partner has borrowed. The spouse who borrowed more will be the one with the higher payments.

How Married Couples Pay More on IBR, PAYE, and SAVE

Now, things get complicated.

Even though the double payment concern doesn’t exist, it is still possible that payments will go up.

The increase can be traced back to the discretionary income math. Loan payments are based upon discretionary income, defined as earnings above 150% of the federal poverty level. (Note: SAVE uses a more generous 225% of the poverty guidelines.)

A quick example of payment calculations will help illustrate the issue. Suppose I earn $44,000 annually, and the federal poverty guidelines say that 150% of the poverty level is $20,000. My discretionary income is  $24,000 per year or $2,000 per month. If I were on PAYE, 10% of my monthly discretionary income would be $200. Thus, I pay $200 per month on PAYE.

For couples who both have student loans, filing jointly or separately impacts the amount of money that you keep each year before you have to make payments. If you file separately, you get to keep that first $20,000, and your payments are based upon the rest. Your spouse also keeps the first $20,000, making payments based on the additional income. By filing separately, you EACH get to keep that first bit of income.

If you file jointly as a couple, you only get to keep that first bit of income once. If your combined income is $90,000, you subtract that $20,000 from the poverty guidelines once, leaving $70,000 of discretionary income. Because of this distinction, a couple will pay slightly more if they file jointly.

For many couples, the slight increase may not offset the downsides of filing separately. However, the only way to know for sure is to do the math on filing jointly and filing separately. Between tax programs that quickly estimate your tax bill and the Department of Education Loan Simulator, comparing the two options isn’t difficult.

Special Rules for REPAYE and SAVE

At one point, the REPAYE plan had special rules for married couples who filed separately. In most cases, borrowers still had to include their spousal income, even though they filed separately. For this reason, many married borrowers were encouraged to stick with PAYE or IBR.

With the creation of the new SAVE plan, the old REPAYE rules were eliminated. This is excellent news for married borrowers who want to take advantage of the new SAVE plan.

Now, spousal income is treated the same for all IDR plans. If you file separately, you can exclude your spouse’s income from your loans. If you file jointly, payments are based on your combined income.

When Married Couples Who Both Have Student Loans Should File Separately

Adding kids to the equation can change the math.

As one reader noted in the comments, being in a family of four means that the poverty guideline number is much higher than it would be for just two. Filing separately and being able to subtract that number twice can make a big difference.

The larger your family, the bigger the potential savings from filing separately, even if you both have student loans.

The Short and Simple Answers for IBR, PAYE, and SAVE Couples Who Both Have Student Loans

• Filing taxes jointly does not mean your student loan payments will double.
• Filing taxes jointly does mean that your monthly payments will be somewhat higher.
• If you have a larger family, the IBR and PAYE benefit of filing separately goes up.
• Borrowers should compare the potential savings of filing separately against the higher taxed bill caused by filing separately.

Finally, I’d also like to point out that getting a low IBR or PAYE payment is not the goal of federal student loan borrowers. The goal is to eliminate the debt. For borrowers chasing after student loan forgiveness, the lower payments are valuable. If you will eventually pay the debt off in full, lower monthly payments just mean the loan will cost more in the long run.

The post IBR, PAYE and SAVE for Married Couples who Both Have Student Loans appeared first on The Student Loan Sherpa.

After many years of missing out on the best repayment plans and forgiveness options, borrowers with spousal consolidation loans finally have a path forward.

The Problem with FFEL Spousal Loans and Joint Consolidation Loans

Prior to July 2006, married couples were given the option of combining their federal debt into a giant spousal consolidation loan. Many servicers encouraged borrowers to utilize this program.

Unfortunately, these loans presented significant issues in divorce and domestic violence cases. Even for spouses who remained happily married, joint consolidation loans caused logistical problems. Congress wisely chose to terminate the troubled program.

Sadly, when Congress ended spousal loans, they didn’t address what would happen to the borrowers who already had spousal loans.

As the years passed by, these borrowers fell through the cracks. Qualifying for forgiveness under a joint consolidation loan was difficult, if not impossible. The spousal loans were not eligible for the best repayment plans, and there was no way to fix the loan eligibility issues.

This site called FFELP Joint Consolidation Loans the absolute worst federal loan.

The Joint Consolidation Loan Separation Act

In a September surprise, Congress passed a bill allowing borrowers to get out of joint consolidation loans.

Couples with spousal loans will be able to apply to separate their combined loan into two individual direct consolidation loans. This means that borrowers can gain eligibility for preferred repayment plans and forgiveness opportunities.

The full text of the legislation provides two methods of separation. The preferred approach appears to be for a joint application signed by both parties. However, an individual can apply for separation in cases of domestic violence, economic abuse, or when the borrower cannot reasonably reach the other individual on the original loan.

The new direct consolidation loans will have the same interest rate as the original spousal loan.

How the Debt Gets Split in a Joint Consolidation Loan Separation

Each individual in a joint consolidation loan gets assigned a percentage of the debt. For example, suppose you have a total balance of $100,000 (including principal and interest) on your joint consolidation loan. If you are assigned 59% of the debt, your new federal direct consolidation loan will have a balance of $59,000. Your spouse’s, or ex-spouse’s, balance will be the remaining $41,000.

There are two ways to determine what percentage each individual is assigned.

Option 1: Original Loan Balances – If you had 37% of the debt when the loans were combined, you get 37% of the debt when the loan is separated.

Option 2: Formal Agreement – If you have a divorce decree, court order, or settlement agreement, the loans can be split according to the terms of the document.

It’s worth noting that payments made during the time of the joint consolidation loan don’t impact who gets what debt. The split is determined entirely by the original loan balances or the formal agreement between the individuals.

The Department of Education will issue final rules for servicers to use once President Biden signs the legislation.

Sherpa Thought: My hope is that the joint consolidation separation process serves as a blueprint for separating other consolidated federal student loans.

A Win for Advocates and Borrowers

As more information becomes available on the Join Consolidation Loan Separation Act, we can dig deeper into the eligibility rules and application procedure.

For now, it’s worth taking a moment to celebrate a big win for an overlooked group of borrowers.

For over 15 years, borrowers with joint consolidation loans were overlooked. New programs created to help borrowers often didn’t include joint consolidation loans. Even though the situation was objectively unfair to the affected borrowers, the group of people impacted was small enough that Congress didn’t feel the need to take action.

Having spoken with many readers of this site who have joint consolidation loans, I know that many of you reached out to your elected representatives demanding action. These calls put this issue on their radar.

Now borrowers just need to wait for the Department of Education to finally make the Separation Application available.

The post Congress Passes Legislation to Separate Spousal Joint Consolidation Student Loans appeared first on The Student Loan Sherpa.

Today we will discuss the pros and cons of REPAYE as it applies to married couples.

In the student loan world, there are two types of couples. The first type is mixed, where one spouse has federal student loans and the other does not. The second type is couples where both spouses have federal student loans.

The distinction between these two types of couples will often determine whether or not REPAYE is a suitable repayment plan choice.

REPAYE Advantages for Married Couples

It is also worth noting that there are a couple of advantages unique to the Revised Pay As You Earn Plan.

REPAYE Interest Subsidy – Because IDR payments are calculated based upon what a borrower owes rather than what a borrower can afford, your student loans may charge more interest than your monthly payment. The REPAYE Interest Subsidy is helpful because it reduces the growth of your student loan balance.

REPAYE Eligibility – REPAYE isn’t the only repayment plan that charges 10% of a borrower’s discretionary income. The Pay As You Earn (PAYE) plan and IBR for new borrowers also charge 10% of a borrower’s discretionary income. Unfortuantely, these plans are only open to newer borrowers. PAYE is only open to borrowers who took out their first student loan after October 1, 2007, and IBR for New Borrowers is only available to those who took out their first loan after July 1, 2014.

Most couples who opt for REPAYE are targeting one of these two advantages.

REPAYE when both spouses have student debt

If both spouses have large amounts of federal student debt, REPAYE can be a great deal.

Suppose that both of you have a combined discretionary income of $100,000. If you both enrolled in Income-Based Repayment (IBR), your student loan payments for the year would add up to $15,000 ($1250 per month). By switching to REPAYE, your student loan payments for a year drop down to $10,000 ($833 per month). This is because IBR requires 15% of your discretionary income, while REPAYE only requires 10%.

The calculation for each individual payment gets a little tricky.

To start, the total combined income is first calculated. Using this number, the total combined payment is determined. Who pays what is based upon your proportional loan balance. If you have equal loan balances, you will both have the same amount. If you have a balance twice as big as your spouse’s, your monthly payment will be twice as big. Regardless of who pays more towards their loans, the combined payments will always add up to 10% of your combined discretionary income.

If one of you enrolls in REPAYE and the other stays on the standard repayment plan, things get expensive quickly. Instead of paying 10% of your discretionary income as a couple, you will pay 10% of your discretionary income plus the standard payment. To minimize monthly spending, both partners should be on the REPAYE plan.

Important Note About Double Payments: Many couples fear that if they both sign up for an income-driven repayment plan that instead of each paying 10% of their discretionary income, they will pay 20%. This is not the case. The Code of Federal Regulations explains that couples will not have to make “double payments” because they are married.

REPAYE when only one spouse has federal student debt

This is a situation where REPAYE falls behind other repayment plans. Unlike IBR and PAYE, REPAYE almost always includes spousal income.

On plans like Income-Based Repayment (IBR) and Pay As You Earn (PAYE), people can opt to file their taxes separately to avoid having to count spousal income. On REPAYE, even if you file your taxes separately, the combined income is still used to determine the payments.

Because of this difference, the math for determining the best plan gets a little tricky. Couples need to look at the cost of filing separately and compare it to the added student loan expenses.

There are two options to choose from:

Option One: File your taxes separately and sign up for IBR. The benefit here is that your spouse’s income is not included in calculating your student loan payment. The downside is that your tax bill will be higher, and you will be paying 15% of your discretionary income instead of 10%.

Option Two: File your taxes together and sign up for REPAYE. The good news here is a lower tax bill and the monthly payment is 10% of your discretionary income. The downside is that it includes your spouse’s income for determining the payment.

The Department of Education’s Student Laon Simulator is a great resource for comparing plans and estimating how different tax strategies impact monthly payments.

The challenge for borrowers is to figure out which route saves more money in the long run. This requires some careful tax planning and an honest assessment of your respective projected earnings. It is tricky, but most couples can do it.

Once you know the plan you want, it is time to contact your loan servicer.

Working with your loan servicer

At the point where borrowers are weighing tax strategy before determining the best student loan plan, things have probably gotten a bit too complicated for the loan servicer’s customer service representative to offer much insight.

In most cases, REPAYE enrollment can be done using the Department of Education’s Website, and the process is automated. The task for borrowers is to make sure that there isn’t a calculation error. One handy tool is the Federal Loan Simulator. The Loan Simulator allows borrowers to use their actual loans to see calculations for various monthly payments.

When seeking help, borrowers should keep in mind that not all servicer representatives are at the same skill level. If there is an error, asking the customer service representative to explain why the loan simulator was giving a lower estimated payment will often help them identify a mistake on their end. This is one of those cases when hanging up and calling again may lead to better help.

Final Thoughts

REPAYE can be great for some married couples but an expensive mistake for others.

The key is to understand the different factors that determine your payments and to put together a long-term plan that works.

Remember, the best student loan plan isn’t necessarily the one that results in the lowest payment for the next month or the next year. It is the one that eliminates the debt in an efficient, workable approach.

The post REPAYE for Married Couples appeared first on The Student Loan Sherpa.

Today, we’ll examine how student loans can impact marriage, and discuss strategies to minimize any potential impact. Just as every relationship is unique, the impact of student debt can also have unique consequences. The key is to understand how student debt can affect monthly finances, tax strategy, and lifestyle. By understanding how these different variables interact, couples can form a plan specific to their needs.

The first step is having an honest discussion about student loans…

Talking with Your Significant Other About Student Debt

There isn’t a good time to drop the student loan bomb on a love interest. Do it too soon, and you risk scaring them away. Wait too long, and you have been hiding a secret. To make the conversation go as smoothly as possible, step number one is to make sure you have a solid understanding of your student debt. Ask yourself questions such as:

• How much do you owe?
• What is your plan for paying it off?
• What are your interest rates?
• How long will it take?

Many borrowers don’t know the answers to all of these questions. Some people have so much debt that they don’t know how they will ever pay it off. Others can point to the exact month and year they will eliminate their debt.

Regardless of where you fall on the spectrum, your debt will affect your future, and will likely affect the future of your significant other.

One key impact of student debt is that it can affect how couples pay their taxes.

Married Couples: Should We File Taxes Jointly or Separately?

Tax planning with student loans is a delicate balancing act. There are many tax advantages to filing taxes jointly. A quick look at a tax bracket table shows that most couples could save a bundle in taxes by electing to file jointly (rather than separately). However, filing jointly can be a major issue for federal borrowers on income-driven repayment (IDR) plans.

Borrowers on IDR plans, such as Pay As You Earn (PAYE), pay a portion of their monthly discretionary income towards their student loans. The government uses the income on your tax return to calculate your discretionary income. Unless you file separately, the government will include your spouse’s income in that calculation. This will likely result in higher monthly payments.

[Further Reading: Which Income-Driven Repayment Plan is Best?]

Note for couples who both have federal loans: The math on filing separately is complicated. Sometimes the math dictates that filing separately is the best move. Other times, it is best to file jointly. How you should file depends on several different circumstances

To understand how the income-driven calculations work, the federal Loan Simulator is a very helpful tool. The Loan Simulator allows you and your spouse to try different income levels, tax filing strategies, and repayment plans to see which works best. You and your spouse will also need to compare the cost of filing separately against the potential monthly repayment savings of filing separately. Couples can either opt for a lower tax bill in April or lower student loan payments throughout the year. If you have your taxes filed by a professional, this is a topic that you should discuss with them.

Be careful not to lose track of your goals! Lowering the minimum monthly payment on your student loans is a good thing, but debt elimination is the goal. If your spouse is working towards a student loan forgiveness program like Public Service Loan Forgiveness, it might make sense to chase the lowest possible payment. If not, living with higher monthly student loan payments might not be the worst thing because it will force you to pay back the debt sooner, which saves money on interest.

The Marriage Penalty on Student Debt

The math from the tax analysis should make one thing clear: there is a measurable cost of getting married for federal student loan borrowers chasing forgiveness or on an Income-Driven Repayment plan.

The exact cost of the marriage penalty will depend on many different circumstances, but two single people could be better off financially than they would as a married couple.

Setting Money Aside for Retirement

Though far off for some, most couples look forward to one day retiring. Student debt can be a big hurdle to retirement-saving.

Retirement math may seem complicated, but the basic concept is simple. Make interest work for you. Saving money in a retirement account allows that money to grow over time. The sooner you start saving, the more your money can work for you. Student loans work in the opposite way. Time and interest are enemies.

Married couples have an advantage over single individuals when it comes to saving for retirement. Two incomes can mean two different retirement programs. Alternatively, if one spouse has an excellent retirement program at work, the couple could focus their retirement planning with the spouse’s income. The other income can be used to pay down the student debt. Thus, the retirement planning advantage for couples is flexibility.

Weighing the option to pay down student debt or save for retirement can be tricky. The key is to get the most out of every dollar. For some, the next dollar will go further if it is used in a retirement account. For others, that dollar will do the most good if it is used to pay down student debt.

The following list of priorities should help decide the best way to allocate your resources:

1. Basic Living Expenses – Everyone needs a roof over their head food in their belly. This should always be the first priority for any couple.  These necessities don’t have to be fancy, but they cannot be neglected.
2. Minimum Monthly Payments – All student loans have a minimum monthly payment. Wanting to save for retirement is great, but if your loans go into default the late fees and collection costs will cause a nightmare. Before getting crafty with your financial planning, first make sure you’re repaying all your bills.
3. Retirement Matching at Work – Now we come to the free money portion of the equation. Many employers will match employee contributions to their retirement account up to a certain point. That means you are doubling your money from the second it gets put towards retirement. This is an excellent opportunity that all couples should look to utilize.
4. Pay Off High-Interest Student Debt and Credit Cards – If you are paying 10% or more on any of your debts, you are taking a beating. The sooner you can stop this bleeding, the better. A debt of this nature should be paid off aggressively. If you are just making the minimum payments, lenders will be making out like bandits.
5. Tax-Advantaged Retirement Accounts – Even if your employer doesn’t match, contributing to a tax advantage retirement account, like an IRA or a 401(k) can be an excellent opportunity. Couples can put money in certain accounts on a pre-tax basis. This means they don’t pay any taxes on the money until it gets withdrawn in retirement. A basic stock market fund or target-date retirement fund can usually be expected to earn 7-9% each year. Some years will be much better, some years will be much worse. But on average, borrowers come out ahead by putting money in a retirement account instead of paying down a student loan at 4 or 5% interest.
6. Medium Interest Student Debt – If you have student loans in the 4-6% range, they should be targeted for aggressive repayment once the couple has maxed out their retirement contributions.
7. Investment Accounts – Setting aside money in an investment account is a great way to make retirement happen as early as possible. Even without tax advantages, this form of saving can be a huge asset for retirement.
8. Low-Interest Student Debt – Right now, student loan refinance companies are offering rates below 2%. If you are lucky enough to have a student loan interest rate this low, you could be better off just paying the minimum and investing the money rather than paying down the debt. For instance, if you are earning 5% on your money and only spending 3% on the interest, you come out ahead. There are risks to this approach for sure. However, for the couple with student debt who prioritizes retirement, it can be a smart move.

The one thing that can throw these priorities out the door is trying to buy a house…

Buying A House

Buying a house is the wildcard that can affect every financial decision a couple makes for years.

Mortgage companies are mostly concerned with a couple’s monthly bills. Setting aside money for retirement is a great choice and responsible financial decision, but it doesn’t necessarily help a couple buy a house.

When buying a home, there are several variables to consider:

• Debt-to-Income Ratio – Credit scores are often listed as the big concern people have when buying a home. However, the Debt-to-Income ratio is just as important. Lenders look at the amount of money a couple earns each month and compares it to the monthly bills on their credit report. Car payments, credit card bills, and student loans are all factors. Large student loan payments are often the reason student loan borrowers struggle to buy a home.
• Down Payment – Traditionally, the expected down payment on a home purchase was 20%. Today, the average down payment is 5%, with some couples putting down even less. However, for many couples, finding the money for even a small down payment can be a challenge.

Fortunately, there are a few tricks that can be utilized to help make homeownership a reality sooner rather than later.

• New Homeowner Programs – These opportunities vary greatly from state to state and even from community to community. Be sure to research potential new homeowner assistance programs in your area. Real estate agents and mortgage brokers can be good sources to consult, but be sure to do your own investigation as well.
• Student Loan Refinancing – Traditionally, student loan refinancing is used to get a lower interest rate on student loans. For couples looking to buy a house, it can also be used to secure lower monthly payments. For example, if you have loans on a ten-year repayment plan and refinance to a lender offering a 20-year repayment term, you can significantly reduce your monthly payments. Lower student loan payments mean an improved debt-to-income ratio and better odds of approval for the amount you want to borrow. However, this trick comes with risks:
  • If you refinance right before you apply for a mortgage it can make the process a mess. Your credit report may even show both the old loan and the new loan at the same time. It is best to refinance at least six months to a year in advance to ensure all the changes show up properly on your credit report.
  • After purchasing a home, you might want to refinance again to acquire a lower interest rate through a shorter repayment length. While borrowers are allowed to refinance multiple times, rate offerings may have changed. A better deal may not be available in the future.
• Knock Out Small Balances First – From a wealth-building perspective, there isn’t much of a point to aggressively paying off a low-interest student loan. However, from a home-buying perspective, it can be. By paying a loan off in full, a payment drops off your credit report and improves your Debt-to-Income ratio. Simply paying down a large balance, while financially sound, doesn’t lower the monthly minimum payment and doesn’t help your DTI ratio.

Pay for a Wedding or Pay Down Student Debt?

Any couple with large amounts of student debt should think twice before spending a bunch of money on a lavish wedding.

Surprisingly, the average wedding cost and the average student debt at graduation are both around $35,000.

This means couples should carefully consider the opportunity cost of their wedding. If the big wedding means living with student debt for the next decade-plus, is it worth it?

This analysis will be different for every couple. Priorities can vary greatly from one couple to the next. Regardless, student debt should be a consideration when wedding planning. Ignoring the realities of student loans could be a regrettable decision.

Should My Husband or Wife Cosign Any Loans?

Having your spouse cosign for student loans or student loan refinancing is usually not advisable. There are two reasons for cosigning should be avoided.

First, it could make future credit decisions more difficult. Most credit decisions are made automatically by a computer. If a couple applies for credit to buy a car or a house, the cosigned loan may be counted twice. Creating this double obligation to pay down the debt should be avoided.

Second, cosigned loans can be a major problem in the event of a divorce. Getting divorced does not relieve an individual of any financial obligations from other loan contracts. To say it makes things messy would be an understatement.

Who gets the student loans in a divorce?

Dealing with student loans in a divorce is tricky.

Before jumping into the details, it is important to note that the rules regarding divorce vary from state to state. The rules in Indiana are very different than the rules in California.

That being said, there is an important concept that couples should understand.

How the loans are handled in the divorce proceeding doesn’t affect lenders. Suppose the terms of the divorce require that the wife pay off one of the husband’s student loans in return for the wife getting to keep the house. As far as the lender is concerned, nothing is changed. The husband is still contractually obligated to pay off the loan. If nobody makes payments on the loan, the husband’s credit score will take the hit. Also, the lender will initiate collections proceedings on the husband. If this happens, the husband could sue his ex-wife for her failure to pay, but he still isn’t relieved of his contractual duty to the lender.

In short, getting divorced can create more student loan responsibilities, but it can’t make any student loan responsibilities go away.

Maintaining an Emergency Fund

Many financial experts suggest that individuals keep, 3- to 6-months worth of expenses in an emergency fund. Some even suggest up to a year. For couples with student loan debt, this can potentially mean a lot of money sitting in a savings account earning very little interest.

The good news for most married couples is that they can often get away with a shorter emergency fund than single individuals. If a single person loses their job, 100% of their income is gone until they find a new job. For a couple, losing an income hurts, but there is still money coming in. If you and your spouse each earn enough to pay the bills for the month independently, it reduces the need for a large emergency fund.

Ultimately, emergency fund planning should be based on how long it will take you to find a new job. If you lose your job today and have a rough time in the job market, how long will it be before you can replace your income?

At a minimum, an emergency fund should include enough money to pay the deductible on any medical bills or to pay an unexpected car or home expense.

Couples, even those with large student debts, can get away with a smaller emergency fund, but they should still have one in place.

Final Thoughts

Student loans can have a huge impact on many dynamics of a relationship and a marriage.

The key to making sure student loans don’t ruin a relationship is to understand the consequences and to have a plan in place.

The post Student Loans and Marriage: Everything You Need to Know appeared first on The Student Loan Sherpa.

One issue that often flies under the radar is whether or not refinancing after getting married is a good idea.

However, any time you have a significant change in your finances, it is a good idea to revisit your student loan strategy. Marriage qualifies as a major change, and refinancing may offer substantial benefits, especially for borrowers with private loans.

The Big Refinance Question: Should I Refinance Federal Loans?

The number one question I receive from readers is whether or not they should refinance their federal student loans. Private loans are easy. If you can get a lower payment or better interest rate, refinancing is an intelligent decision. Unfortunately, the decision to refinance federal loans isn’t as straightforward.

The federal refinance analysis usually depends on a critical comparison. Borrowers should weigh the federal loan benefits, like loan forgiveness and income-driven repayment, against the savings from a lower interest rate. If the federal protections are more valuable, refinancing federal loans is a mistake. On the other hand, if the potential savings from a lower interest rate is more valuable, refinancing is a smart move.

Getting married influences this basic refinance analysis…

The Marriage Penalty Changes Refinance Math

The marriage penalty is a harsh reality of life with student loans. I’ve argued that the federal government should take action, but under the current rules, getting married usually has negative consequences for federal borrowers.

The marriage penalty can be the most severe in couples where only one spouse has student loans. To minimize the marriage penalty, these couples often file their taxes as married filing separately.

Couples who both have student loans still face a marriage penalty. It can be especially expensive in couples with children.

Because of the marriage penalty, the cost-benefit analysis may change the outcome of the refinance question. After marriage, a couple may decide that chasing federal student loan forgiveness no longer makes sense and the federal protections are unnecessary. These couples may benefit from refinancing their federal student loans.

Cosigning is Still a Risk to Avoid

Occasionally refinance lenders will ask an applicant to find a cosigner for their loans. If possible, couples should avoid cosigning for each other.

There are two major risks to married couples acting as cosigners:

• Divorce – This is an outcome that no newlywed wants to consider, but it is a sad reality. Prenuptial agreements and divorce decrees don’t have the authority to release a cosigner from the loan. Cosigning for your spouse can make a divorce even more ugly and complicated.
• Future Credit Applications – Computers automatically make most credit decisions. At times, these computers struggle to handle student loans. Cosigning for a spouse increases the odds of an automated rejection in future credit applications.

Some lenders will even allow spouses to refinance their student loans jointly. This option is even worse than consigning. Couples should avoid a joint refinance unless there is no other alternative.

If you refinance, refinance the loans in your name and don’t use a cosigner.

Maximizing the Benefits of Student Loan Refinancing

There are two refinance routes with special appeal for couples.

Strategy #1: Aggressive Repayment – Suppose you and your spouse plan on having kids in five years. However, before starting your family, you want to have your student loans paid off. By refinancing to a 5-year loan, you can get the lowest possible rate and pay off your loan as quickly as possible.

At present, the best 5-year rates are offered by the following lenders:

Rank	Lender	Lowest Rate	Sherpa Review
T-1		4.86%	ELFI Review
T-1		4.86%*	Splash Financial Review
3		5.29%	Laurel Road Review

Strategy #2: Maximize Flexibility – If your goal is to buy a house, a refinance can be a huge help. Refinancing can help a borrower improve their debt-to-income ratio, AND refinancing can lower monthly payments. Lower monthly payments mean couples can set aside more cash for a down payment. (Make sure you refinance with plenty of time before you plan on buying a house.)

To maximize flexibility, select a 20-year loan. This will get minimum monthly payments as low as possible. Of course, borrowers can always pay more than the minimum to eliminate their debt quicker, but the low minimum gives the borrowers the choice of attacking student debt or focusing on another financial goal.

The best 20-year rates are offered by the following lenders:

Rank	Lender	Lowest Rate	Sherpa Review
1		6.08%*	Splash Financial Review
2		6.53%	ELFI Review
3		6.55%	Laurel Road Review

The post Should You Refinance Your Student Loans After Getting Married? appeared first on The Student Loan Sherpa.

For many couples, the marriage penalty makes repayment significantly more complicated. Taxes get recalculated, and repayment strategies changed. These subtle differences in repayment plan terms can have a huge impact on monthly payments for married couples.

The Biden administration could simplify repayment by eliminating the marriage penalty.

What is the Marriage Penalty?

For most borrowers, the best repayment option is an income-driven repayment (IDR) plan. The goal behind the IDR plans is to ensure that borrowers can afford their monthly student loan bills. These plans bill borrowers based upon what they can afford rather than what they owe. Another key feature of IDR is that borrowers can qualify for some of the best student loan forgiveness programs.

Unfortuantely for married borrowers, spousal income impacts plan selection and monthly payments. Most married couples file their taxes jointly. By filing taxes jointly, the combined income of the couple determines monthly payments. Unless your spouse has no income, this method of payment calculation results in higher monthly payments.

Higher payments also impact loan forgiveness math. Larger monthly payments leave a smaller balance to be wiped away at the time forgiveness is earned. The increased monthly bill may result in borrowers paying off their debt in full before forgiveness is earned.

How to Avoid or Minimize the Marriage Penalty

Some — but not all — IDR plans exclude spousal income if the couple files their taxes separately. However, filing taxes separately may mean a larger tax bill. As a result, many couples have to weigh the benefit of lower student loan payments against the larger tax bill. Even though most couples can figure out the best strategy without outside help, the process makes student loan repayment unnecessarily complicated.

Payments on non-IDR plans like the standard 10-year plan, the graduated, and extended plan do not include spousal income. Thus, borrowers can avoid the marriage penalty by selecting a non-IDR plan. However, this route may not be a viable choice for borrowers with larger balances and smaller incomes. Additionally, these non-IDR plans eliminate many student loan forgiveness options.

Arguably, the two biggest advantages of federal student loans are the IDR plans and student loan forgiveness. Unfortunately, getting married may greatly reduce both of these benefits. Due to the reduced usefulness of federal loans, many newly married borrowers may elect to refinance their student loans with a private lender.

Refinancing permanently converts federal debt into a private loan, but it also gives borrowers a lower interest rate. At present, the best refinance rates are with the following lenders:

Rank	Lender	Lowest Rate	Sherpa Review
T-1		4.86%	ELFI Review
T-1		4.86%*	Splash Financial Review
3		5.29%	Laurel Road Review

The options to avoid the marriage penalty are complicated, and they all come with major drawbacks. However, these strategies may help borrowers reduce the total cost of the marriage penalty.

Why Penalize Married Borrowers?

There isn’t any evidence to indicate that the government specifically intended to create a marriage penalty for student loan borrowers.

Instead, the marriage penalty appears to be a byproduct of our tax filing system. Unlike most other countries, American couples usually file taxes together. Because the most recent tax return is the preferred way to document income for IDR payment calculations, spousal income becomes a factor.

Many aspects of the U.S. policy seem to encourage marriage. In addition to tax breaks, couples have healthcare benefits, better insurance terms, and important legal protections. Thus, penalizing marriage for student loan borrowers is inconsistent with the majority of U.S. federal policy.

How the Government Could End the Marriage Penalty

Fixing the marriage penalty is simple.

Instead of relying upon a recent tax return, borrowers could use recent paystubs to document their income when calculating IDR payments. Federal servicers already use recent paychecks to calculate payments for borrowers who have a change in income. Couples could opt to use this alternative documentation approach to certify payments without their marital status entering the equation.

This fix is simple. It makes student loan repayment significantly less complicated, and it means student loan borrowers can get married without having to worry about an expensive marriage penalty in student loan repayment.

President Biden is currently in the process of streamlining and simplifying IDR repayment. Eliminating the marriage penalty should be a part of this discussion.

The post Biden Should End the Marriage Penalty on Federal Student Loans appeared first on The Student Loan Sherpa.

Unfortunately, this common practice is not usually the best choice. There are two main reasons.

Reason #1: Getting Credit in the Future

Buying a house is often the biggest purchase couples make. To make sure they can afford their dream home, it’s smart financial planning is crucial. Surprisingly, student loans can have a significant impact on a borrower’s ability to qualify for a mortgage.

In theory, a couple’s ability to afford a home should not change whether or not they cosigned their spouse’s student loan. In reality, however, it matters.

This issue isn’t just about buying a house; it affects getting any kind of loan.

Imagine you’re buying a $25,000 car with your spouse. If both of you sign the car loan, that $25,000 shows up on both of your credit reports. When the time comes to apply for a mortgage or any other credit, lenders will look at your debt-to-income ratio. The monthly payment on that car loan will have a negative impact on your debt-to-income ratio. It will have the same consequence for your spouse.

Some lenders may try to tell you that they won’t double count your debts, but due to lending automation, that is a very tough promise to make. A computer using a fixed formula makes most credit decisions. These systems provide very little room for human input, and they are far from perfect. As a result, double counting of shared debt is a genuine problem.

Important Note: These cosigning issues apply to both new in-school student loans and refinanced loans.

Reason #2: Divorce

Thinking about divorce is the last thing on a married person’s mind, but with the high divorce rates, it’s a reality that needs to be factored into financial planning. Many couples choose to form a prenuptial agreement for this very reason.

Cosigned debt, particularly student loans, can become a huge mess if a couple splits. Here’s why:

Firstly, student loans are sticky; even with recent policy improvements, they complicate a bankruptcy, which can sometimes follow a divorce. This means that long after you’ve cleared other debts, student loans can still haunt you.

Secondly, your bank or lender doesn’t care about your personal drama. If you cosigned a loan with your spouse, and then you two split, you’re still responsible for that debt. A divorce doesn’t free you from your loan obligations. Legally, you’re stuck with the debt no matter how your relationship changes.

Thirdly, many don’t realize that prenuptial agreements or divorce court decisions don’t affect your dealings with your lender. Even if a divorce decree states your ex should pay off the student loan, you’re still liable as a cosigner. If your ex doesn’t pay, it’s your credit score that suffers. Sure, you can try to recoup your losses by taking your ex to court if you end up paying, but it’s a complicated and messy ordeal.

In summary, divorce courts can divide assets and debts, but they can’t change the names on a loan contract. If your former spouse doesn’t keep up with payments, the lender will look to you for money. You’re left with two choices: pay off the debt or risk damaging your credit. Either way, if you do pay, attempting to get that money back can be a complex and unpleasant process.

Alternatives to Cosigning Loans

Lenders often prefer loans to have a cosigner because it means there are two people legally responsible for paying back the debt, not just one.

The silver lining is that the student loan refinancing market is very competitive. Lenders understand that not everyone can or wants to have a cosigner.

To get around needing a cosigner, the key is to compare offers from multiple lenders. This site tracks over 20 lenders and recommends that borrowers check rates with between 5 to 10 lenders to make sure they’re getting the best rates possible.

Avoiding and/or Fixing a Mistake

If you are thinking about refinancing your student loans with your spouse, carefully consider your options. The risks are genuine, and they are significant. The potential reward, a slightly lower interest rate, hardly justifies the many possible negative consequences.

If you have already cosigned your spouse’s student loan debt, the good news is there are several strategies that can be used to remove cosigners from loans.

The post Tip for Married Couples: Don’t Cosign Loans appeared first on The Student Loan Sherpa.

Married borrowers are often expected to pay more on their federal student loans than a borrower with the same income who happens to be single.

Income-driven repayment plans are one of the great perks about federal loans because they help ensure that student loan borrowers can always afford their monthly student loan payments.

Unfortunately, the formula for determining what a borrower can afford often includes the salary of their husband or wife.

There is no question that there is a penalty for married borrowers. Instead, the question is, how do I handle this situation and minimize the expense?

The good news is that there are several ways to address this problem.

How can my husband or wife’s income increase my monthly fed loan payment?

Before jumping into possible solutions, it is worthwhile to take a moment to understand why spousal income can cause student loan bills to go up. After all, solving a problem can be really difficult if we don’t understand the problem we are trying to solve.

Borrowers enrolled in an income-driven repayment plan for their federal loans have to certify their income each year. Typically, this income certification takes place using the borrower’s most recent tax return.

The borrower’s Adjusted Gross Income (AGI) will determine monthly payments. When couples file their taxes, the AGI is calculated based upon the combined income of the couple.

Based upon the rules currently in place, the government has decided that an individual’s ability to make payments on their student loans changes based upon the income of their spouse. If your husband or wife has a large income, the government expects you to pay more.

Fortunately, there are a couple of tricks that can be used to minimize the marriage penalty for student loans.

A Special Note for Couples who both have federal loans: Getting married may cause changes in student loan payments.

Some couples worry that their monthly payments will double. This isn’t the case.

However, it is possible that there will still be a marriage penalty, especially for couples with children.

Can I just use a paystub to certify income so that my spouse’s income isn’t included?

If the combined AGI is the number that causes the problem, it would stand to reason that submitting alternative documentation of income, such as a paystub, would fix the issue.

Sadly, it isn’t that simple.

When borrowers certify their income, the form requires information about marital status and spousal income.

Alternative documentation of income will not exclude your husband or wife’s income.

However, there is one tax decision that can make a big difference…

Filing Taxes Separately

Couples that file their taxes as “married filing separately” do not have to include spousal income when calculating monthly payments on certain income-driven repayment plans.

Unfortunately, this approach isn’t necessarily an easy call for married borrowers.

By filing separately, the IRS may impose a larger tax bill. Many important tax breaks are not available to individuals who file separately. Notably, couples that file separately cannot take the student loan interest deduction.

Further, filing separately only helps with certain income-driven repayment plans. Borrowers on the IBR, PAYE, and ICR plans can lower their tax bill by filing separately, but those on REPAYE will still have to include spousal income.

When it comes to tax strategy, many different variables enter the equation. Those considering this route should review the issues that come into play when filing separately to save money on student loans.

Changing Repayment Plans

Not all repayment plans require income documentation.

Borrowers looking for lower monthly payments may be better off with the graduated or extended repayment plans. Monthly payments on these plans are based upon the borrower’s balance. To get an idea of what your payments might be on the various plans, the Department of Education’s Student Loan Repayment Estimator is an excellent tool.

Those considering switching repayment plans need to carefully consider the impact on student loan forgiveness. While the income-driven plans qualify for multiple types of student loan forgiveness, the graduated and extended plans are not eligible.

Aggressive Repayment of the Debt

Some borrowers may find that the higher monthly payment is more of an annoyance than a huge financial burden.

Couples in this situation may want to consider aggressively repaying the debt.

The idea here is that the faster the debt is paid off, the less will be spent on interest. Paying more now means savings in the future. Many refinance lenders will also refinance the loans at a lower interest rate to help borrowers find additional savings.

The downside of aggressive repayment is that you are taking student loan forgiveness off the table. For some borrowers, this is a savvy move; for others, it might be a bit too risky.

Should we consider a divorce?

If there is a “marriage penalty” to student loan borrowers, it would seem that divorce might seem like a possible solution.

While there may be potential student loan savings to be had, getting a divorce involves far more than just signing a couple of forms.

In addition to the many financial and social consequences of a divorce, there are other issues that borrowers must consider. One example would be visiting your spouse during a hospital stay. Those that are divorced have significantly fewer legal rights.

Anyone seriously considering this step should sit down with a divorce attorney so that they can understand the many consequences to getting a divorce purely for financial reasons.

An Important Final Thought

Much of this article has discussed how marriage can impact minimum monthly payments on income-driven repayment plans.

Those planning their student loan repayment strategy should focus on debt elimination rather than monthly payments. For most borrowers, the loan will have to be paid off in full. Paying extra money each month may not be convenient, but it will save money in the long run.

Don’t get carried away focusing on the next 12 months. Instead, think about the next 12 years.

The post Help! My Student Loan Payment Went Up Because I Got Married! appeared first on The Student Loan Sherpa.

If you are on an income-driven student loan repayment plan, such IBR, PAYE, or SAVE, how you file your taxes will change your monthly payments. File jointly, and your spouse’s income affects how much you pay.

Today we will look at the advantages of filing separately and cover the many reasons why filing separately isn’t an easy decision.

What is the advantage of filing separately?

Federal student loans come with a variety of income-driven repayment (IDR) plans. The IDR plans allow borrowers to make payments based upon what they can afford rather than what they owe.

In the case of married couples, the government will count the income of both spouses when determining how much a couple can afford to pay for their student loans.

One way to avoid counting spousal income for IDR payment calculations is to file taxes separately. By filing taxes as married filing separately, spousal income isn’t factored into the IDR calculations, except in a few circumstances detailed below.

What if we both have student loans?

Many couples fear that if they file jointly, their student loan payments will double. This is not accurate.

However, even if you both have student loans, it is possible that the payment will go up by filing jointly. Thus, you should still follow the steps described below to compare options.

For those curious, this article breaks down the ways IBR, PAYE, and SAVE payments are calculated for couples who both have federal student loans.

Do your taxes… twice

The question of filing jointly or separately does not have a simple answer, and the results can vary from one couple to the next. Enter math.

The major benefit of filing separately is that you end up with lower student loan payments. However, those lower payments come at a cost. That cost is in the form of higher taxes.

In the past, this cost was attributed to a change in tax brackets as there was a clear penalty for filing separately. Recent changes to the tax code have reduced or eliminated this particular penalty for most taxpayers.

Even though the tax bracket issue is much less of a problem, filing separately is still likely to be the expensive alternative. The only way to know how much is to do the math. Prepare a joint return, and then two individual returns. The cost of filing separately is the extra taxes that you will have to pay on those two individual returns.

Why is filing separately more expensive?

Filing separately means that a couple is no longer able to claim many popular tax deductions and credits.

Common tax credits lost by filing separately include:

• Earned Income Tax Credit
• American Opportunity and Lifetime Learning Education Tax Credits
• Exclusion or credit for adoption expenses
• Child and Dependent Care Tax Credit

Most noteworthy for student loan borrowers is that the student loan interest deduction is lost by filing separately.

Couples that wish to deduct the student loan interest must file jointly.

Consider your repayment options

The Department of Education makes this step pretty easy. They have created this wonderful tool called the Loan Simulator. Using this resource, you can find out what your student loan payments would be in a variety of circumstances.

Use the repayment estimator to figure out your monthly payments if you file separately and your monthly payments if you file jointly. If you have any questions about plan choices or monthly payments, be sure to call your servicer so that you understand all of the options and limitations.

Filing Separately on REPAYE and SAVE

Originally, borrowers on the REPAYE plan didn’t have the option of filing separately to exclude spousal income.

When REPAYE was overhauled to eventually become SAVE, this limitation was removed. Borrowers on REPAYE and SAVE can file taxes separately to exclude their spouse’s income from payment calculations.

If you see articles stating that REPAYE always includes spousal information, you are likely looking at outdated information.

Keep an eye on capitalized interest

If your monthly payments on IBR or PAYE are less than the monthly interest that accrues each month, you should also give some thought to capitalized interest.

When your loan balance is growing because your monthly payments are less than the interest, your servicer is tracking the extra money each month. It isn’t immediately added to your principal loan balance. Instead, they just keep a running tally of this additional money you owe. By not adding it to your principal balance, you avoid paying interest on that interest.

Switching repayment plans can cause the accrued interest to be “capitalized,” meaning it gets added to your principal balance. When you have interest capitalization, your balance goes up, and your monthly interest payment also goes up.

The best way to deal with a growing balance situation is to sign up for the new REPAYE/SAVE plan. There is a new subsidy that will cover 100% of that monthly unpaid interest. It prevents loan balances from spiraling out of control.

An Important Reminder

The decision isn’t quite as simple as just picking the option that costs less money. It is also essential to consider how this decision fits in with your overall student loan plan and tax strategy.

Remember: student loan debt is money owed to the federal government. Getting lower payments does not mean you will owe the government less. In fact, the opposite is true. The less you pay now, means more interest will accumulate, and you will pay more in the long run.

However, if you are certain you will be qualifying for loan forgiveness, the decision is then just a simple comparison of which option saves you the most money for the next year.

Because student loan forgiveness is a variable, if the numbers are close, it might make more sense to opt for the higher student loan payment. This route keeps taxes lower and reduces a debt that may have to be paid in full.

Filing Separately in Community Property States

Borrowers who live in a community property state will have an extra layer of complication.

The following states have community property rules: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

In community property states, couples that file separately must each report half of all community income on their tax return.

Community property is defined as property that you, your spouse, or both acquire:

• During your marriage
• While you and your spouse are living in a community property state

This strange income reporting rule can lead to some odd outcomes when doing the math on the best way to file. This site has previously taken an in-depth look at how couples in community property states might have to adjust their repayment strategy.

Should Student Loan Borrowers File Jointly or Separately?

On the surface, the decision to file jointly or separately is one of just picking the option that costs less. In many cases, it comes down to just doing the math and picking the less expensive choice.

However, it can be beneficial to think not just about next year, but the next 10 or 20 years, when you make this decision. Concepts like student loan forgiveness and capitalized interest can potentially sway your decision.

If you feel overwhelmed about your choices, this might be a situation where you do all the research you can, think about your future plans, and then discuss things with a financial planner or an accountant.

The post Taxes and Student Loans: Married Filing Jointly or Married Filing Seperately? appeared first on The Student Loan Sherpa.

Student loan forgiveness programs, such as Public Service Loan Forgiveness, require a borrower to enroll in an Income-Driven Repayment (IDR) Plan. The benefit of an IDR plan is that borrowers make payments based upon what they can afford rather than what they owe. The problem for married borrowers is that these payments are usually calculated based upon what the borrower and their spouse earn.

Some IDR plans, such as Pay As You Earn (PAYE) and Income-Based Repayment (IBR) allow borrowers to file their taxes separately from their spouse in order to avoid a “marriage penalty”. The problem is that this maneuver results in a higher tax bill each April. A couple filing taxes separately will pay more than two individuals who are not married.

Things get even bleaker for borrowers on the Revised Pay As You Earn (REPAYE) plan. On this repayment plan, spousal income is included in monthly payment calculations regardless of how a couple’s taxes are filed.

Avoiding the Marriage Penalty for PSLF

In many households, student debt exceeds all other forms of debt combined. Borrowers working in public service are forced to very carefully consider the consequences of marriage.

One such borrower recently emailed us:

My name is Jenny and I am a Physician Assistant working at a non-profit. I have $250K in student debt and have a current salary of $120K. I am on the REPAYE debt repayment plan and also enrolled in the PSFL program. I am already 2 years into payments on the PSFL and pay $750 monthly.

My main question is about marriage. My boyfriend and I would like to get married, buy a house, and have kids in the near future, but I would like to proceed with the most financially beneficial life plan, even if that means excluding marriage. Could you please offer some advice on this area?

He has no debt and a similar income. It is my understanding that if we file taxes as married but filing separately, under the PSFL/REPAYE I will still have monthly payments based on both incomes. Under these circumstances, we will be in a higher tax bracket.

Based on the above information, I have concluded that, with my debt to income ratio,  it is best to not get married and continue on with the PSFL, to pay back the least amount over time.

Are there any unsuspected pitfalls we may incur (e.g. not qualifying for a home loan due to high student debt; unsuspected taxes/penalties once we purchase a house together or have children together)? Also, do you know of any strategies, so that if we opt to not get married (in the state of California we could at the very least have some legal recognition when it comes to health rights, health benefits, children that we should look into? Maybe just appointing each other DPOA for the health-related decision-making? etc.

Also, are there alternative debt repayment strategies I should consider at this current time?

Any suggestions on how to drive down gross income to minimize monthly payments apart from investing in my 403B at work?

My last question is, what happens if the PSFL program is no longer offered over the next few years? Would I likely kick over to an alternative repayment plan and what would that look like (just so I can prepare for the worst-case scenario)

For Jenny, the financial consequences of marriage are clear.  The next question is… what are the consequences of not getting married.

[Note: For borrowers who are already married and worried about their repayment options, be sure to check out this article on PSLF for married couples.]

Jenny’s email hits on many of the relevant issues that need to be considered by a couple considering putting off marriage in order to eliminate student debt.

Pitfalls of not getting Married

Marriage is far more than just a ceremony or status as a couple.

Marriage can impact life as an American in many different ways.

Jenny properly notes that by not being married, her boyfriend has far fewer rights in a hospital situation than he would as her husband. A durable power of attorney is a document that would give him the right to make medical decisions should Jenny not be able to do so.

Not being married would also make it very important for Jenny to have a will drafted. A boyfriend or girlfriend really has no special rights in the event of death. A spouse does. Having a will means the significant other is able to receive assets in death such as a house or retirement accounts. Any couple seriously considering not getting married would be wise to discuss the implications in their state with a local attorney.

Transferring property between a married couple and two single individuals is also treated much differently from a tax perspective.

Many pension programs, as well as social security, are impacted by marital status. Not being married can mean that these retirement benefits die with the beneficiary rather than being passed on to the spouse. Obviously, the specific details will vary depending on the pension program and the state the couple resides, but the one thing that is certain is that not being married can have a major impact.

Alternative Repayment Strategies

A couple may decide that forgoing marriage may not be the best route.

Jenny could opt to switch to the Income-Based Repayment plan and file taxes separately once married. Switching from REPAYE to IBR means she will have to make payments based upon 15% of her discretionary income rather than the 10% required under REPAYE. However, by making this switch, she could keep her husband’s income out of the monthly payment calculations. The cost of this would be the higher payments from switching repayment plans and the higher payment on the yearly tax bill.

Alternatively, once married, Jenny could stick with REPAYE and live with the higher payments that are based upon her husband’s income as well. She could still go after Public Service Loan Forgiveness, but the amount forgiven would be smaller.

If PSLF is no longer an option, the best choice may be aggressive repayment. Going this route, Jenny accepts the fact that PSLF isn’t a value for her and just tries to pay off her debt as fast as possible. She could even refinance her student loans, but that choice also comes with risks. By refinancing she could get a lower interest rate allowing her to pay off the debt faster, but the loans would no longer qualify for PSLF or any income-driven repayment plans.

Lowering Payments on Income-Driven Repayment Plans

Jenny properly notes that contributing to the 403(b) at work will give her lower monthly payments on an income-driven repayment plan. This is because 403(b) contributions lower a borrower’s AGI (Adjusted Gross Income) on their tax return.

Anything that lowers AGI will also lower monthly payments on income-driven repayment plans.

Options to lower AGI include:

• Traditional IRA and 401(k) contributions
• Health Savings Account contributions
• Student Loan Interest Payments

This site has previously covered tax strategies to lower AGI and get lower student loan payments.

What is Public Service Loan Forgiveness is Eliminated?

Elimination of PSLF is a real concern. However, the bigger concern for most borrowers should be that they don’t qualify for the program.

To date, only a small percentage of the applicants for PSLF have been approved. Any borrower considering PSLF should make sure that they understand all the PSLF rules and regulations and that they are submitting an employer certification form on a yearly basis.

As for the program being eliminated, borrowers have a number of protections in place.

1. It would take a change in the law for the program to be terminated. That means passage in the House, Senate, and Presidential approval. Such a move would be highly unpopular with groups such as law enforcement, teachers, and other public servants.
2. Most staffers in Congress also qualify for PSLF. They are unlikely to advocate that their bosses eliminate such a valuable program.
3. The contract between most borrowers and the government (the Master Promissory Note) includes PSLF in the terms of the agreement. That means that even if the law changes, borrowers still have a contract with the government calling for the program.

Because of these limitations, all proposals to date to eliminate or cap PSLF have failed. It is also worth noting that every proposal to eliminate or cap PSLF has grandfathered in existing borrowers.

All that being said, Jenny is smart to plan for a scenario in which she doesn’t qualify for PSLF. We suggest creating a high-interest savings account with money set aside for student loan debt. Call it the Plan B account. If the program is eliminated, or Jenny leaves public service, or gets a big raise, the Plan B account can be used to attack the debt. If PSLF ends up working out, that account can be a boost to retirement savings or a new house.

Final Thoughts

This is a huge decision.

Getting married or not getting married is a decision of major consequence.

Finding the right repayment strategy for six figures of student loan debt is critical.

Making things even more difficult is the fact that life could have other plans forcing a borrower to throw their strategy out the window.

The key is to understand the different options available. Think about how future events in your life could change the plan.

There is no absolute right way or wrong way. The best path will be the one that is carefully considered and evaluated.

The post Waiting on Getting Married to Chase Public Service Loan Forgiveness appeared first on The Student Loan Sherpa.