Marriage is an incredibly exciting time in your life – you are embarking on a new journey with your spouse at your side. What used to be “mine” is now “ours” and for better or for worse – this includes student loans.
Finances, but more specifically student loans, can be very difficult to talk about with your soon-to-be, or recently married, spouse. However, it is incredibly important to understand the impact that marriage has on student loans so neither of you are taken by surprise if your student loan payment drastically increases.
Here are 3 common situations and some high-level points you should know.
If one spouse has public student loans
Public loans have the name “Direct” or “FFEL” in the loan title. You can see all of your student loans by logging into NSLDS which contains all of your public student loan information.
It is important to understand what your loan status is – the most common loan statuses are:
- Deferment: Most commonly when you are still in school or in a graduate fellowship
- In Grace: The 6-month period after you graduate before loan payments start
- Repayment: You are paying off loans, likely through a standard repayment or income-based repayment plan
Marriage impacts student loans that are on an income-based repayment (IBR) plan. These plans calculate your payment by multiplying your income (after a state-specific poverty line deduction) by a certain percentage (most commonly 10%). These are usually the best plans for borrowers because the payments are designed to better fit your income level. The IBR payments (except for Revised Pay As You Earn or REPAYE) are capped at the payment amount for the standard 10 year repayment plan. In other words, your IBR payments (except for REPAYE) won’t pay off your loans any faster than 10 years.
However, once you marry, it is likely that your spouse’s income will now be included in your student loan payment calculation. Let’s say Arya (shout out to GOT fans) has $250,000 of student loans and earns $100,000/year. Before she is married, her student loan payment are likely around $683/month.
Let’s assume that she marries Gendry (we all wanted this) who also earns $100,000/year and they file taxes jointly (which is most common). Arya’s monthly student loan payment will now balloon from $683/month to $1,467/month; a 115% increase. This is called the “marriage penalty” with regard to student loans.
However, there are ways to avoid this. As long as you are not on REPAYE, you can file taxes separately, which excludes the other spouse’s income. It may come at a small cost of paying a bit more in taxes to the government, but you should weigh that vs. the massive increase in student loan payments you are now required to make. This is a strategy that I shared in this CNBC article.
If both spouses have public student loans
It gets really complicated when both spouses have student loans that are on an income-based repayment plan. Each spouse needs to first evaluate their own student loan payment strategy and then consider how marriage affects it.
Let’s continue Arya’s example and say she is working at a non-profit 501©(3) organization. She will very likely be eligible for tax-free public service loan forgiveness (PSLF) if she makes eligible income-based payments for 10 years with the proper record keeping requirements.
Now, say that Gendry still earns $100,000/year, but also has $250,000 of public student loans. He works at an employer that is not eligible for PSLF.
So… now what? You want Arya’s payments to be as little as possible because she is on track for tax-free PSLF after 10 years, but Gendry is not on track for PSLF so he will have a different repayment strategy. See how this gets complicated?
The type of repayment plans and how you file your taxes really matters. In this situation, they would likely want to file taxes separately and even have Arya max out pre-tax retirement contributions to further drive down her income (and thus payments). Gendry may need to contribute less to retirement accounts so his income can be used to pay a higher portion of their day to day expenses.
This strategy only works for IBR payment options that are not REPAYE – typically the best IBR plan is PAYE, but not all loans are eligible for PAYE. Does your head hurt yet? Yeah – no wonder why student loans is such a massive issue.
If one/both spouses have private student loans
Private student loans are far less flexible than public student loans. You rarely have the option to change how much your payments are, as you do with public student loans. You should always be careful when refinancing public loans – you need to weigh the flexibility and forgiveness provisions of public loans vs. the possible decrease in interest paid of private loans.
Although morbid, it’s really important to review the private loan promissory note about what happens if one spouse were to pass away. If Arya had private student loans and she didn’t succeed in killing the Night King, it is likely that her entire private student loan balance could become due at her death. This could leave a huge debt behind for her spouse that she never anticipated.
- Be open and honest about each spouse’s student loan payments. Have the conversations before you get married about how marriage may affect your student loan payments. I strongly believe this should not stop you from getting married, but rather help you properly plan your cash flow as a team.
- Pay very close attention to how you file taxes. Filing taxes separately may result in a huge savings on your student loan payments.
- Carefully consider what student loan repayment strategy you are on. The standard 10 year repayment plan may not be the best fit for you and it may make sense to switch to an IBR plan.
- Seek out professional advice, especially when both spouses have student loans. Student loans are really complex and you need to fully understand how your student loan repayment strategy affects your other financial goals. Some student loan borrowers may be eligible for PSLF, whereas other student loan borrowers may actually be eligible for taxable student loan forgiveness. This is something I recently spoke to Forbes about in this article.
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