For married couples with student loan debt, one of the most popular strategies for lowering your monthly student loan payment and potentially qualifying for more student loan forgiveness is to file your taxes "married, filing separately".
For both Income Based Repayment (IBR) and Pay As You Earn Repayment (PAYE), your monthly student loan payment is calculated based on your Adjusted Gross Income (AGI). If you're married and file a joint tax return, your monthly student loan payment is calculated on your joint AGI. So, a simple way to potentially lower your student loan payment and increase your potential student loan forgiveness is to lower your AGI - and married couples can potentially do this by filing separately versus jointly.
The Problem With Married Filing Separately For IBR Or PAYE
There are two big issues to consider with this approach. First, this doesn't apply to the Revised Pay As You Earn Repayment Plan (RePAYE). With RePAYE, no matter how you file your taxes, the married joint AGI is what is taken into consideration.
Second, and typically a bigger issue, is that the math doesn't always make sense to do it. You see, when you file separately, you typically also have to pay more in taxes as a couple. As such, you have to outweigh the potential savings from your student loan debt against the higher taxes you'll face. Even if you save a little on your monthly student loan payment, it might not outweigh the higher taxes you'll face each year.
Let's look at a couple of scenarios and see how the math behind married filing separately for IBR and PAYE really works.
The Sweet Spot For Married Filing Separately For IBR Or PAYE Maximization
Let's start with the ideal scenario, because that's what everyone cares about. So, let's set up this scenario as it's pretty typical. We have a couple, with Person A and Person B. They have one child that is 10 years old.
Person A makes $40,000 per year and has $50,000 in Direct Loans.
Person B makes $60,000 per year and has no student loan debt.
Let's look at how their tax return looks. For simplicity, both partners only have W2 income for their AGI.
Married Filing Separately Versus Jointly
Adjusted Gross Income
Tax Credits (Child Tax Credit)
Taxes Net Of Credits
As you can see in the above example, this couple saves $552 per year in taxes by filing jointly.
However, Person A also has that $50,000 in Direct Loans. If this couple files a joint tax return, they do not qualify for IBR or PAYE. If we assume this couple is looking for the lowest payment option for their loans, the best option is the Extended Repayment Plan. Their payment would be $347 per month for 300 months (25 years) - the same length as IBR. That equates to $4,161 per year.
Now, if this couple files married filing separately on their taxes, they will pay $552 more per year. But it opens up more repayment options for Person A. For example, Person A will now qualify for both IBR and PAYE.
For PAYE, the monthly payment will $133 per month, with the potential for loan forgiveness of $45,630 after 240 months. For IBR, the monthly payment will be $200 per month, with no potential forgiveness after 300 months.
So, if Person A switches to PAYE, they will save $214 per month in student loan payments alone. That equates to a savings of $2,568 per year in student loan payments.
So let's combine both the higher taxes and lower student loan payments and see what we get:
Student Loan Savings By Filing Separately
Total Tax Due
Total Annual Student Loan Payments
So, by making the switch from filing jointly to filing separately, you can expect to save $1,041 per year. Plus, you put yourself on track for potential student loan forgiveness after 20 years as well.
When It Doesn't Make Sense To File Separately For IBR Or PAYE
There are a few scenarios where it doesn't make sense to file separately in order to save on your student loan payments. However, everyone should run the math for their unique situation to decide for themselves.
Some rules of thumb for when it might not make sense:
- When the student loan borrower makes more
- When the income of the borrower wouldn't qualify for IBR or PAYE separately
Easy Ways To Do The Calculations
This may seem a bit overwhelming because there is a lot of math and scenarios to plan for. However, most tax software programs allow you to calculate the difference in taxes you'd pay under both married filing jointly and married filing separately. If you utilize an accountant to help with your taxes, they should also be able to provide you with the differences as well.
Then, you can look at your Federal loan repayment options on the Department of Education Repayment Estimator.
Finally, you just add up the costs. You can use the chart above as a guide to see how your tax and student loan payments would add up, and see which way to file your taxes saves you the most money in total.
Depending on your tax situation and student loan amount, it could save you money to file your taxes married filing separately so that you can qualify for IBR or PAYE and save on your student loans. However, you have to remember that you'll pay more in taxes, so it's important to do the math and see what scenario makes the most sense for you.
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