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 | |||
|---|---|---|---|
| Person A | Person B | Joint Return |
Earnings | $40,000 | $60,000 | $100,000 |
Adjusted Gross Income | $40,000 | $60,000 | $100,000 |
Personal Exemptions | $8,100 | $4,050 | $12,150 |
Deductions | $9,300 | $6,300 | $12,600 |
Taxable Income | $22,600 | $49,650 | $75,250 |
Regular Tax | $2,728 | $8,184 | $10,360 |
Tax Credits (Child Tax Credit) | $1,000 | $0 | $1,000 |
Taxes Net Of Credits | $1,728 | $8,184 | $9,360 |
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 | ||
|---|---|---|
Filing Jointly | Filing Separately | |
Total Tax Due | $9,360 | $9,912 |
Total Annual Student Loan Payments | $4,161 | $2,568 |
Total | $13,521 | $12,480 |
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.
Get Professional Help
If you want to get professional help with your student loan debt, I recommend Ameritech Financial. They can do some of the calculations for you, and are experts when it comes to handling multiple student loans.
You can call them 24 hours a day and talk to them for free: 1-866-863-3870. You can also get information on their website here: Ameritech Financial.
Conclusion
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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I just applied for reevaluation of my payment plan on my student loans. My payment is MORE now. Several hundred dollars more a month. I selected the REPAYE plan.
What is the cheapest option? I can’t afford this doubling of my payments a month.
Ryan, it depends on your situation. RePAYE always uses your married filing jointly income, so it could raise your payments. You also have to resubmit your income every year, so if your income goes up, so does your payment.
You might consider signing up for our Student Loan Freedom program when it reopens this fall: http://thecollegeinvestor.com/student-loan-freedom/
Robert, great article, as always! I work with a number of professors who make a good amount of money (usually married filing jointly) and have 2-3 kids. I have been showing them PSLF. Would you typically suggest IBR or the revised PAYE?
I typically recommend IBR or PAYE, and avoid RePAYE. There are few scenarios where RePAYE makes sense, most notably because it always uses your married filing jointly AGI and you don’t have options to file separately. However, every scenario is different, and in some cases, if you have Direct loans prior to 2007, it might make sense to do RePAYE anyway.
Is there any please to physically go to have a face-to-face conversation about what plan is best for my particular situation? I am IBR but not sure whether I should file married or jointly. My husband was out of work 18 months ago for almost 2 years – we have a lit of credit card debt from that time period making loan payments difficult. Who can we go see? Thank you
No, sorry, there isn’t a place for you to meet face to face for your student loans. The Dept of Education should consider that though. To do the calculation here, though, you should talk to your tax preparer to do the calculation yourself with a free calculator on TurboTax or H&R Block.
If I go with Married Filing Separately to keep my payments down, can I go back and amend my return to Married Filing Jointly at a later time? I know this is kind of “working the system”, but I’m curious if it’s a legitimate loophole, or if there are laws against it.
Yes, but it’s best to consult with a tax advisor before making changes one way or the other.
Hello: I live in CA, a community property state. Under REPAYE, if we file separately, is our individual income, after splitting everything, how each person’s payments will be determined? Or even in a community property state, does the joint income determine the monthly payment?
I should add that we both have student loan debt, though my wife is paying back through a standard repayment plan. I am currently in REPAY with a much larger debt load. Our strategy has been to file separately, thus keeping my payments low, while paying off my wife’s loans aggressively.
Under RePAYE, it doesn’t matter your filing status, it always considers your combined income (AGI). This only applies to IBR and PAYE.
Even though my wife is paying back through standard repayment? As such, she’s not eligible for any IBR repayment plan. Thanks for your service.
Yes, the rule under RePAYE is that it is always combined AGI if you’re married. It has nothing to do with her loans or repayment plan.
I am considering staying home with my children, but my husband and I are strapped with loans (loans prior than 2007 so no option for PAYE). Would we be taxed too much if I claimed Married Filing separately and did IBR? From what I understand, with that option I would pay nothing on my loans while claiming MFS. Another thing I heard is that they hit you with the taxes when you return to work so I am unclear what to do. Any advice?
It’s best to speak to a tax accountant to run the different scenarios for you. Many accountants can quickly prepare a return for both MFJ and MFS and tell you which would be the better choice.
Thanks for all of the great information. One of my questions relates to how the debt “appears” under the PAYE program. According to the calculator on the FSA website our payments would be $0.00 but not entirely sure whether that is accurate. We are trying to apply for a mortgage and wondering if under the PAYE program whether an amount is reduced monthly that would appear on a credit report, etc.
Also, the FSA site mentions to qualify for the PAYE program one must, “Continue to make income-based payments under this plan, you must have a partial financial hardship (and be a new borrower).” Since these loans have been on deferment, would they be eligible? Thanks-
Yes, you can switch to PAYE while on deferment. Just call your lender or go online to studentloans.gov.
When applying for a mortgage, your lender uses either of the following to calculate your monthly payment for Debt to Income ratio purposes:
– 1% of the balance of the loan amount
– your standard 10-year payment plan amount
Many people find they have trouble qualifying for a mortgage because of this. Remember, the lender is looking out into the future – so since your payment could rise if your income does (and it caps at the standard 10 year plan amount), that is what’s used for your debt to income ratio.
Great article Robert! Thanks for writing this. I have been paying IBR for 5 years, aiming to take advantage of public service loan forgiveness after 10 years. For that reason I’m aiming to keep payments as low as possible. I just got married this year, my wife has paid off her loans but mine are considerable. I make several thousand per year more than her annually ($75k / $70k). While I make more, I’m not sure if filing jointly makes sense if I’m hoping to keep payments low to leverage PSLF. Any thoughts?
You have to do the math. Most tax software and tax professionals can easily calculate this for you. PSLF is a great program, but you have to do the math.
Robert,
I am enrolled in the PSLF program and currently on the Income Driven Repayment plan. I have done the math; it seems that filing married but separate would be wise as my payment would be hundreds of dollars less a month. In earlier comments, I saw that you advised using the IBR or PAYE repayment plans. On the FedLoan website, it states you have to have a partial financial hardship to qualify. What constitutes as a partial financial hardship for these federal loans? And if I were able to qualify this year, when I re-submit information the following year, will they automatically keep me in the IBR or PAYE, or will I have to prove that I have a financial hardship every year?
Among other debts I am trying to pay off, I would like to save for my kids college so that they don’t have to deal with the stress of tens of thousands of dollars of student loans post graduation…does that count as a financial hardship? HA!
Thanks for any advice!
Partial financial hardship means your income is low enough that 10 or 15% of your discretionary income would be less than your standard 10 year repayment amount.
You can calculate your discretionary income here: http://www.lendkey.com/studentloans/2013/11/05/how-do-i-calculate-my-ibr-payment/
If you get on these programs, you have to re-certify your income every year. Your payments could rise, but they won’t exceed your standard 10-year plan amount.
I have student loans which I obtained before marriage and am not employed. My spouse is employed. Will my loan payments be based on my spouse’s income? He is not a co-signer and we have not co-mingled our debts.
If you’re on IBR or PAYE, it’s based on your combined AGI is you file together. On RePAYE, it’s always based your combined AGI regardless of how you file.
Hello!
My husband and I are newly married and live in California, a community property state. I make $60k/year, have $36,000 in student loan debt, and am on IBR to pay back my loans under PSLF. My husband makes $80k/year, has $105,000 in student loan debt, and is on IBR to pay back his loans under PSLF as well. We have no dependents and do not own a house.
We are trying to do our taxes this year and have reached out to a tax professional at H&R Block here in California, who seemed to know nothing about MFS in a community property state. I am fairly certain MFS is right for us, but if anyone out there has any advice, we’d love it!!!
You need to speak to a real accountant/tax professional. Tax preparers (like what you’ll find at H&R Block) are not tax professionals or accountants. You could also do the math yourself using online tax software if you prefer.
Here is an article you might find helpful. https://www.ftb.ca.gov/Archive/Forms/2004/04_1051A.pdf
Thank you! 🙂
My wife will finish graduate school by the summer and will get a job with a school to be in the 10 year program. Her loans are pushing 300k and the difference between filing MJ (1500) and MS (700) is 800 a month. That’s basically a 10k a year difference.
I made 86k and maxed out my 401k so my MAGI is 68 and I paid over 13k in taxes. Using just the standard deduction I should get back 1700 or so. Her MAGI is about 74 and paid almost 12k in taxes. She’ll have to pay but at this time it seems worth it to file separate. I’m sure there is something I missed and we’ll end up paying 7k or something. lol
We are both around 50 and have no kids or plan to. The only downside is she can’t deduct loan interest but it is capped at 2000 or 2500 anyways.
I think as long as I max out my 401k it’ll help towards filing MS….I hope anyways. We visit our tax lady next week to compare.
I’ve been married filing separately to qualify for the IBR for a few years now. This time around, the application is requesting my spouse’s income.
I contacted the Federal Student Aid Office (studentloans.gov) and they told me that they now look at total income (both spouses) whether you file separately or not, and that they changed the policy last year.
This sounds fishy to me, and someone told me over the phone the opposite answer. Nevertheless, my application is requesting my spouse’s income and I’m worried if I send that in I’ll be disqualifed for IBR and will end up with an enormous payment…
Any idea what’s going on here?
They go by your total adjusted gross income for RePAYE – both IBR and PAYE can still just be based on your income. You can file the paper form manually (not online).
GH, I’m in a similar situation and they are asking for proof of my husbands income. The IBR plan I applied for in the PAYE which means they shouldn’t need his financial informations since we filed separately. Did you need to submit your wife’s income documentation? Did they end combining your incomes for your repayment plan?
thanks
So I was curious about this and yep, I was on to something. I have finished one year of PSFL and was on an IBR. I resubmitted income and my payment went up. I am not sure if the first year asked about my wife’s income but now I am back on in-school deferment. I want to resubmit due to making less money due to working a Chaplain Residency (1/2 of pay is non-taxable for housing allowance). What is the best way to do this? Maybe a paper application??? Any advice is greatly appreciated.
Yes, send in a paper application certified mail: https://static.studentloans.gov/images/idrPreview.pdf
I’m a college professor and got wise to this a few years ago. As soon as I got accepted into PSLF, I started filing married separate and chose IBR. We have 5 children and I’m ~100k in debt. My husband makes much more than I do, so “on paper,” with 5 dependents, with my income, I’m a hard case 😉 This move dropped my monthly payment by about $750, and coupled with my 120 payments to forgiveness (I’m about 30 in), I will save nearly $90k in the end.
This is what I plan on doing! I do not qualify for IBR if filing jointly (AGI too high). And my payment is almost $7k more under REPAYE. I see that we will pay about $3k more in taxes if we file separately, but I am still saving $4k overall. I am just curious… are there any unforeseen consequences to filing separately? I know I will miss out on some tax credits. And I found that there is a “penalty” if I switch back to REPAYE from IBR (which I would do if for some reason we decided to go back to filing jointly). This information is not available publicly and varies depending on what customer service agent I talk to (unfortunately a little too common of a feature that goes with Fed Loan Servicing and the PSLF program). It seems to me, if I continue filing separately, and the PSLF program actually pays off this is great, because it also incentivizes me to pay into retirement and further reduce my AGI and monthly IBR payment. I just hope I’m not missing anything here. Best to all!
What type of “penalty” are you talking about? If you want to switch from one plan to another, you can do so once per year, so long as the maximum loan term for the new plan is longer than the amount of time your loans have already been in repayment.
Great article. Thank you.
My wife is on her third year of IBR (not RePAYE) and currently qualifies for PSLF. Her annual salary is roughly $55,000 and she has over $300,000 in loans. My salary for 2016 was $70,000 and I do not have any loans. Next year my salary will be $250,000.
In order to protect her future eligibility for IBR and PSLF do we need to file Married but Separate for 2016 or can we file jointly in 2016 to receive the benefit and then file separately in 2017 when my salary increases. We are having an accountant run the 2016 numbers (joint vs separate filing) and will weigh that against what her adjusted monthly payment would be next year. But we also want to make sure we are not jeopardizing her PSLF or monthly payments in the future. We appreciate your advice!
PSLF doesn’t care how you file your taxes – you just need to be on IBR. Even if that amount of the IBR payment equals the standard plan, IBR is what matters.
For PSLF specific questions, you might find our short eCourse helpful: http://thecollegeinvestor.com/17523/pslf-online-video-training/
Hi Robert, thanks for the article very useful. My family is in almost an identical situation as described in your example above, except add $50,000 student loan debt to person B too. We have been paying the 30-year payoff amount for about 6 years now but as our family is growing finances get tighter. We are looking at switching to IBR, but after reading your article it looks like we cannot until we switch to Married filing Separate, is that correct? (We have two different government-backed servicers so I was wondering how they’d know our AGI but Student Loan debt separate.)
Thanks,
You can switch anytime, but it will use your combined AGI if that’s how you filed your taxes.
I have a similar question to those above with comparing MFS and MFJ in Community Property State (Texas) and how it will impact the student loan payment for my wife’s student loan. She is a school counselor with about $40K in student loan debt and is currently paying under the PAYE plan. I make about $110k and she makes about $65k annually. How is her student loan payment calculated each year if we file MFS in a community state? I want to make sure that it’s worth filing separately instead of jointly.
You need to speak to an accountant or tax professional to do the math for you to see if its worth it. But generally, you must split all the household income and expenses on each return, not just his income/her income. So, in your example, you each would have income of $87,500.
If I was to consolidate my student loans and start the IBR plan under the PSLF program what income would they use, my taxes from 2016 that I just filed in 2017? We filed MFJ this year but want to do MFS for the future. Does that mean we will pay the MFJ until we can change to MFS next year? The only reason we had to file MFJ this year is because we used the affordable care act and I think it is a requirement.
Thanks for such an informative blog.
They would use your income from 2016 AGI.
Great conversation here – thanks! I don’t believe I saw this question above, and have not been able to find an answer. We have done the math, and it makes sense for my husband and I to file MFS. On our taxes though, I claimed one of our children, and my husband claimed the other. Will this become a factor when I go to re-certify my IBR? The loan calculator asks how many children we have, not how many I am claiming – is this correct? I just don’t want to have a rude awakening when I go back to re-certify my IBR, if they consider my family size 2 instead of 4, based on my 1099.
They should go based on your taxes.