Who Claims the Children? A Post-Divorce Guide to Understanding IDR Plan Eligibility

For anyone experiencing divorce, it’s one of life’s most stressful and traumatic events. It’s unlikely you entered marriage thinking you would go through the emotionally draining journey of divorce. First, know that you’re not alone. Roughly 50% of all marriages in the U.S. end in divorce or separation by the 20-year mark, according to the National Survey of Family Growth. It can happen regardless of economic, educational, racial and religious backgrounds.  

Importantly, once the dust has settled, there’s hope and a real chance for a fulfilling life. Unfortunately, divorce can bring overlooked and unforeseen challenges. This article provides an overview of a commonly missed post-divorce issue: Who claims children for student loan income-driven repayment (IDR) plans after divorce? 

In my role at Student Loan Planner®, I’ve provided personalized consultations to many parents who have either gone through a divorce or are in the process. For legal advice about your situation, consult a family law attorney in your state.

Untangling the knot of financial and legal separation

Divorce detangles two individuals financially and legally, especially in marriages with children. In addition to financial separation, arrangements must be made to ensure that the kids’ well-being (food, clothes, shelter, education, etc.) is preserved. Most divorces with children involve two distinct legal documents:

• Allocation agreement: Generally defines custody rights, parenting time, decision-making authority, etc.
• Marital settlement agreement (MSA): Outlines the financial settlement of marital assets and how future child-related expenses will be handled. 

Both documents largely follow state laws and statutes. However, federal student loans, like federal taxes, fall under federal jurisdiction. This is where it gets complicated for parents with student loans on IDR plans.

Related: Are Student Loans Community Property? 9 States Where They Are (And What to Do)

Family size: A crucial piece of the IDR payment puzzle

IDR plan payments are based on a percentage of your “discretionary” income. This is your adjusted gross income (AGI) minus a stipulated multiple of the federal poverty line for your family size that depends on your repayment plan:

• Income-Contingent Repayment (ICR): 100% of the poverty guideline.
• Pay As Your Earn (PAYE): 150% of the poverty guideline.
• Income-Based Repayment (IBR): 150% of the poverty guideline.
• Saving on A Valuable Education (SAVE): 225% of the poverty guideline.

For example, for a parent earning $200,000 with a family size of three on the PAYE plan, discretionary income is calculated using 150% of the poverty guideline for 2024, or $38,730. The calculation would look like this: 

Discretionary income = $200,000 (AGI) – $38,730 (150% of the poverty line amount for family size) = $161,270 

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Only one parent can claim a child for IDR payment calculations

Like federal taxes, only one parent can claim a dependent as part of their household. As you can probably deduce, this affects the IDR monthly payment — the parent claiming the dependent can have a higher poverty line deduction and a lower IDR loan payment. 

That brings us to the key question: Which parent can claim the dependent for IDR purposes? Although the MSA and allocation agreement should address this question, they don’t always provide clear answers. 

Even if the MSA spells out which parent claims a child for tax purposes and who has primary custody or more parenting time, these factors alone don’t guarantee a parent’s eligibility to include the child in their household for IDR payment calculations.

The federal perspective on tax and loan guidelines

Federal law supersedes state and local law, and federal student loans and taxes are subject to federal laws and statutes. For federal taxes, the custodial parent (who has the child child for more parenting time each year) can claim them for tax purposes. This parent may file as head of household and access all associated tax deductions and benefits ( dependent care credit, ability to use a voluntary Dependent Care FSA, etc). 

What’s confusing about this scenario — and why some divorce settlements aren’t clear on this topic — is that a parent with less time could become eligible to claim a dependant on their taxes. It’s possible with IRS form 8332, where the parent claims the child as a dependent but can’t claim various dependent care credits and/or deductions.

For more specific tax-related head of household benefits and how the IRS determines majority parenting time, please review IRS publication 504.

Related: How to Get a Student Loan Tax Deduction

The student loan exception

For Federal student loans, the rule is a little bit different. Regardless of living arrangements or parenting time, the parent providing over half of the child’s financial support can claim the dependent. Unless the divorce settlement specifically states otherwise, the Department of Education defaults to the parent who pays more of the child’s expenses each year.

Proactive strategies for divorced parents

What can you do to ensure you can rightfully claim your child for student loans? Consider these strategies:

• If you’re going through a divorce or contemplating it, ask your attorney to include specific language in your settlement agreement. This should guarantee that you’re the one claiming and spending the majority on your child’s expenses, even if it’s just $1 more than the other parent.
• If you alternate claiming your child yearly for tax benefits, ensure the agreement includes language for you to claim and spend more (even by just $1) on the child during your year.
• If you’re already divorced, review your MSA. The parent who can prove they’re incurring the most parenting expenses should be eligible to include the child as part of their household for student loans.

Keep in mind that this isn’t meant to serve as legal or tax advice for your individual situation. For any specific legal questions, consult a family law attorney licensed to practice in the state you and your dependents will primarily reside.

Hope and clarity post-divorce

You can and will get through this tough time. My hope is that you found this information valuable in clarifying some of your unanswered questions. For personalized advice, our student loan consultants are here to help. Check out how the consult process works and book a time that’s convenient for you.