Written By Melanie Lockert
Managing your finances in a marriage takes work. Add student loans to the mix and there’s a whole new level of complexity and considerations, especially if you want lower monthly payments.
To reduce payments, federal student loan borrowers can choose one of the four income-driven repayment (IDR) options. However, your tax filing status on your federal income tax return can affect how much you pay. Read on to learn which IDR plans require spousal income, the latest changes and what to consider as a married borrower choosing IDR.
Understanding income-driven repayment plans
Income-driven repayment plans are designed to make payments more affordable for those with Department of Education federal loans. Though you might hear the phrase “income-based plans” thrown around, many people actually mean “income-driven repayment plans.”
Income-Based Repayment (IBR) is one type of repayment plan under the IDR, whereas income-driven repayment is the umbrella term for all four options, which include:
- Saving on a Valuable Education (SAVE) plan (a new plan that replaced Revised Pay As You Earn [REPAYE])
- Pay As You Earn (PAYE) Repayment plan
- Income-Based Repayment (IBR) plan
- Income-Contingent Repayment (ICR) plan
IDR plans calculate your student loan payment based on 10% to 20% of your discretionary income depending on the plan, and your family size. The repayment term is either 20 or 25 years. Once the payment plan is complete, student loan borrowers might qualify for student loan forgiveness on their remaining balance.
Regardless of which IDR plan you choose, you must provide income information and go through the recertification process every year.
Get Started With Our New IDR Calculator
The role of spousal income
Being married means sharing a life together — and that means combining the various aspects of your lives. If you’re married, you and your spouse are considered as sort of a unit instead of an individual, especially to the IRS.
As a result, spousal income might be considered when calculating your IDR monthly payment amount. Having an inflated joint income can increase your monthly payments.
Whether an income-driven repayment plan includes your spousal income, depends on your tax filing status. Typically, spousal income is considered when your tax filing status is Married Filing Jointly (MFJ). The joint income can affect your eligibility for PAYE and IBR and your payment amount.
If your tax filing status is Married Filing Separately (MFS), then your spouse’s income won’t be included. Additionally, if you’ve filed jointly in the past, but are currently separated or divorced from your spouse, only your individual income is used. This is also the case if you’re unable to reasonably access your spouse’s income.
Which IDR plans require a spouse’s income?
Ultimately, all of IDR plans use your spousal income, if you file taxes as Married Filing Jointly. Here’s a breakdown of how each plan treats married borrowers.
| Repayment plan | Percentage of income | Repayment term | Married filing jointly | Married filing separately |
|---|---|---|---|---|
| SAVE plan | 5%* to 10%* | 20 or 25 years | Joint income | Individual income |
| PAYE plan | 10% | 20 years | Joint income | Individual income |
| IBR plan | 10% to 15% | 20 or 25 years | Joint income | Individual income |
| ICR plan | 20% | 25 years | Joint income | Individual income |
Saving on A Valuable Education (SAVE), formerly REPAYE
The Biden administration launched SAVE which replaced REPAYE. SAVE requires spousal income if you’re Married Filing Jointly. If you don’t want to include your spouse’s income, consider filing as Married Filing Separately so your monthly payment only uses your individual income in the calculation.
This is a major change, as on the previous REPAYE plan, spousal income was used in all cases, whether filing a joint or separate tax return.
Pay As You Earn (PAYE)
The Pay As You Earn plan includes spousal income when Married Filing Jointly. Since PAYE has a financial hardship requirement, the joint income determines your eligibility and how much you’ll pay.
If you’d like to avoid using your spouse’s income, you can file separately so only your income is factored into the equation.
Income-Based Repayment (IBR)
Under IBR, spousal income is used when Married Filing Jointly, and you must also demonstrate partial financial hardship to qualify. Your total joint income is used in your monthly payment calculation and might affect whether you meet the plan’s eligibility criteria.
If you file Married Filing Separately, your monthly payment is based exclusively on our income and doesn’t include your spouse’s earnings.
Income-Contingent Repayment (ICR)
Like the other IDR plans, Income-Contingent Repayment includes spousal income for its monthly payment calculation, if the spouses file a joint return. Those who file their taxes are Married Filing Separately, and don't need to provide spousal income information.
However, there’s one caveat. Married borrowers have the option of choosing to pay Direct Loans jointly under the ICR plan, regardless of tax filing status.
SAVE repayment plan: A closer Look
In the past few months, there’s been a big shakeup on the student loan scene with the arrival of the SAVE plan. It replaced the old REPAYE plan, and in doing so, revised some of its guidelines. Previously, married borrowers under REPAYE always provided joint income data — regardless of their tax-filing status.
This was frustrating for those who filed separately and whose monthly payments would be lower by excluding spousal income. SAVE changed this rule. If you file separately, you can keep your income separate under SAVE. Additionally, there’s no longer a requirement for your spouse to sign your IDR application.
Strategies for borrowers
If you’re married and want to enroll in an income-driven repayment plan, including the new SAVE plan, talk to your loan servicer. You must fill out an Income-Driven Repayment Plan Request on StudentAid.gov.
Here are some strategies and tips to keep in mind.
Tips for borrowers considering MFS vs. MFJ
When considering your tax filing status ask yourself the following questions:
- How much student debt do you have?
- How does each plan affect your IDR payment? Does it go up or down, compared to the others?
- Which IDR repayment options provide the lowest monthly payment?
- How does the plan affect your tax benefits?
- Does your spouse have debt? (If they do and you file a joint return, this is taken into consideration in your payment calculation.)
- Are you pursuing Public Service Loan Forgiveness (PSLF) to discharge your loan balance after 10 years of payments? If so, filing separately might be the best path.
How to navigate repayment plans with high spousal incomes
If your spouse has a high income, that can drive up your repayment costs if you file your taxes jointly. This is especially the case if they don’t have student loan debt. Use our IDR payment calculator to see how filing jointly, versus separately, affects your payments.
Let’s say you have a family size of two and you earn $50,000 with $80,000 in student loans at 6%. Your spouse earns $100,000 and has no student debt. If you file your taxes jointly, your payment would be $792 per month on SAVE. Comparatively, filing separately results in a SAVE monthly payment of $129.
If you decide to file separately for a lower IDR payment, make sure your net tax benefit exceeds the tax advantages you might be giving up in the process.
Calculating spousal income in community property states
If you live in one of the nine community property states, your spousal income is calculated a bit differently. Even if you file a separate return, you’re still obligated to report 50% of your spouse’s income and community property assets, according to TurboTax.
This can present a hurdle when trying to keep payments low. If you file separately but live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin, reach out to your loan servicer. Ask if you can provide alternate documentation so that only your individual income is included.
Next steps
Married borrowers who want an IDR plan must do a little extra work to learn the most affordable, smart and strategic approach to paying student loans and filing taxes. Filing tax returns separately could help keep loan payments low, but might reduce other tax benefits leading to a greater tax liability.
To ensure you’re making the most informed decision for your tax situation, talk to a tax professional. For a customized repayment plan, a Student Loan Planner consultant can offer advice that gets you to your unique goals. Book a consult today.
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