The income-driven repayment plans (IBR/PAYE/REPAYE) are extremely beneficial but 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.
During your IBR/PAYE/REPAYE application or yearly renewal (https://studentaid.gov/idr), you will be asked if you are married and how you filed your most recent federal income tax return.
The federal tax code offers several incentives for filing your taxes jointly when married and often reduces your household tax burden compared to filing separately. However, income-driven repayment plans often incentivize filing separately, particularly IBR and PAYE. The benefit of filing separately depends on which spouse 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 short and long-term student loan repayment savings of filing separately.
Consider your options annually; you can change your tax filing status each year. You can even go back three years and amend a married filing separately return to filing jointly (if it makes sense to do so - the pandemic forbearance benefits have given many married borrowers reason to do so since no student loan payments have been due). Perform a cost-benefit analysis for each spouse as your family, income, and tax details change, particularly if you live in a community property state. 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:
- Who has federal student loans and what are the respective proportions?
- What is the division of income between spouses?
- What repayment plans are you able to use?
- What are you stating as your family size on your income-driven repayment documents?
- Will you save more in monthly student loan payments by filing separately than you receive in tax breaks by filing jointly?
- Do you live in a “community property” state?
Examples of Considerations for Married Borrowers Considering PAYE or REPAYE
Example 1: Taxes filed jointly, both have federal Direct student loans
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Combined AGI = $150,000, reside in non-community property state, i.e. Illinois
Spouse 1 federal loan debt = $100,000; Spouse 2 federal loan debt = $200,000
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- Total payment is determined by combined AGI or combined alternative income documentation
- Total payment is allocated to each borrower based on their proportion of the total debt held
- Your Discretionary Income is the difference between your AGI and 150 percent of the HHS Poverty Guideline amount for your family size and state
- The 2023 HHS federal poverty guideline for a family size of 2 is $19,720:
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Discretionary Income=$150,000 – (1.5 × 19,720) = $120,420
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Your total household monthly payment due under PAYE (or REPAYE) is 10% of your Discretionary Income divided by twelve:
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Total PAYE or REPAYE payment = 0.10 × $120,420 = $12,042 per year or $12,042 ÷ 12 = $1004 per month
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- Spouse 1 has ⅓ of total debt, thus minimum monthly repayment = ⅓ × $1004 = $335 per month
- Spouse 2 has ⅔ of total debt, thus minimum monthly repayment = ⅔ × $1004 = $669 per month
Example 2: Taxes filed jointly, one spouse has federal Direct student loans
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Combined AGI = $150,000, reside in non-community property state, i.e. Ohio
Spouse 1 has no federal student debt; Spouse 2 federal loan debt = $200,000
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- Total payment is determined by combined AGI or alternate income documentation
- Discretionary income calculation same as illustrated in Example 1, with family size = 2
- Minimum total PAYE or REPAYE monthly repayment amount applied to Spouse 2 loans = $1004/month
Example 3: Taxes filed separately, both have federal Direct student loans
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Spouse 1 AGI = $30,000; Spouse 2 AGI = $120,000, reside in non-community property state, i.e. Iowa
Spouse 1 federal loan debt = $100,000; Spouse 2 federal loan debt = $200,000
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- Each PAYE payment is determined by individual AGI or alternate income documentation
- REPAYE still requires you to provide your spouse’s income, even if you file your taxes separately
- Discretionary Income calculation still uses family size of 2 but a separate discretionary income calculation is done for each spouse, or in total for REPAYE:
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Discretionary Income, Spouse 1 (PAYE) = $35,000 – (1.5 × 19,720) = $5,420
Discretionary Income, Spouse 2 (PAYE) = $120,000 – (1.5 × 19,720) = $90,420
Discretionary Income, Combined (REPAYE) = $150,000 – (1.5 × 19,720) = $120,420
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The monthly payment due under PAYE for each borrower is 10% of their Discretionary Income divided by twelve:
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PAYE payment, Spouse 1 = 0.10 × $5,420 = $542 per year or $45 per month
PAYE payment, Spouse 2 = 0.10 × $90,420 = $9,042 per year or $754 per month
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*** Notice the difference in loan repayments compared to Example 1 ***
- This difference highlights the importance of comparing the tax benefits of filing jointly vs. the loan repayment benefits of filing separately
- Do this comparison each year as family size, income(s), state of residence, and tax details change
The monthly payment due under REPAYE is 10% of their combined Discretionary Income divided by twelve:
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REPAYE payment = 0.10 × $120,420 = $12,042 per year or $1004 per month
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- Spouse 1 has ⅓ of total debt, thus minimum monthly repayment = ⅓ × $1004 = $335 per month
- Spouse 2 has ⅔ of total debt, thus minimum monthly repayment = ⅔ × $1004 = $669 per month
Example 4: Taxes filed separately, one spouse has federal Direct student loans
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Spouse 1 AGI = $30,000; Spouse 2 AGI = $120,000, reside in non-community property state, i.e. Florida
Spouse 1 has no federal student loan debt; Spouse 2 federal loan debt = $200,000
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- Payment amount is determined by the borrower’s individual AGI or alternate income documentation
- REPAYE still requires you to provide your spouse’s income, even if you file your taxes separately
- Discretionary income calculation still uses a family size of 2 but a separate discretionary income calculation is done for the borrower only:
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Discretionary Income, Spouse 2 (PAYE) = $120,000 – (1.5 × 19,720) = $90,420
Discretionary Income, Combined (REPAYE) = $150,000 – (1.5 × 19,720) = $120,420
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Your monthly payment due under PAYE or REPAYE is 10% of your Discretionary Income divided by twelve:
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PAYE payment, Spouse 2 (PAYE) = 0.10 × $90,420 = $9,042 per year or $754 per month
REPAYE payment = 0.10 × $120,420 = $12,042 per year or $1004 per month
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*** Note the difference in monthly payment depending on how you file your taxes and/or which repayment plan is used ***
- This highlights the importance of comparing the tax benefits of filing jointly vs. the loan repayment benefits of filing separately as well as the type of repayment plan you’re considering
- Do this comparison each year as family size, income(s), state of residence, and tax details change
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:
- File your federal tax return as married, filing separately
- Income-Driven Repayment Plan Request: Section 4B, Item 14 = No (See Income-Based Repayment Plan Request Form)
- Your family size for loan repayment calculation purposes will be at least 2
- Depending on your remaining answers to Section 4B, you may need to provide documentation for you and your spouse (recent pay stub, w-2, offer letter, etc). Only your income documentation will be considered for repayment calculations if you are using IBR or PAYE.
- Send everything certified mail or make sure you receive an electronic receipt of your submission
Key Takeaways
- Filing jointly may benefit couples where both partners have federal student debt
- May reduce the overall payment that each of you pays toward your loans
- Receive all of the tax benefits of filing a joint tax return
- Filing separately may benefit couples where one spouse has debt, or there is a large discrepancy in the share of total household income, or at least one spouse is working towards PSLF.
- Long-term loan repayment savings might outweigh short-term tax benefits
- May lose many tax benefits associated with filing jointly
- EVERY situation is unique. Run your numbers to see which filing option is best for you.
- Use tax software or consult with a tax professional to compare filing separately vs. jointly
- Simulate your loan repayment under each scenario to see long-term cost differences
- If you live in a community property state
- You have more options for providing income documentation that could result in IDR being even more favorable
- You can use either your tax return AGI or alternative documentation of income to keep your student loan payment low
- If your spouse's income is higher than yours, use alternative income documentation, ie) a recent pay stub
- If your income is higher than your spouse's income, then use your separate tax return AGI