[Editor's Note: The following guest post was submitted by a doc that would like to remain anonymous. We have no financial relationship. I hesitated to run it, just because I am such a fan of traditional marriage no matter its financial costs, but decided in the end that I get enough questions like “Should we avoid marriage because of this financial advantage or that financial advantage?” that it was an important enough subject to feature here. ]
Socially But Not Legally Married
Several months ago, I had the most wonderful day of my life. I stood on an altar, in front of all of my family and friends, and said my vows to the woman who that day became my wife. We promised to spend the rest of our lives together, through thick and thin, in front of everyone meaningful to us. We had a beautiful outdoor ceremony, then spent the whole night dancing, drinking, and partying with everyone in the world who was important to us. There was one relative who was notably absent from the ceremony, however. Our good old Uncle Sam was not invited.
Marriage and its Penalty
My wife and I met early in the first year of medical school, and quickly knew that what we had was special. We lived together through most of medical school, and when the realities of the match and the possibility of being launched across the country from each other appeared in fourth year, we made the decision to get engaged. We wanted to prove to each other, to our loved ones, and to everyone critically evaluating us as a “couple's match” that we were dead serious about the meaning of our relationship and our desire to be together. It was the right move at that moment in our lives. In the ensuing months, as I started to do some research and wedding planning, I came across the unfortunate reality that, from a financial perspective, legal marriage is a total bust for a two physician couple. The two main drivers behind this were the way that REPAYE is structured, and the marriage tax penalty. In this post, I'll explore both of those financial disincentives, and how we came to the decision together to get socially married but not to sign the legal marriage paperwork.
How the REPAYE Interest Subsidy Works
The first driver, and the one that probably had a greater effect on our decision, is the REPAYE federal student loan repayment program. This is the newest student loan program that has been offered by the Department of Education since 2015, designed to expand the benefits of the PAYE program to many more borrowers. Anyone with federal direct, Stafford, Grad PLUS, or federal consolidation loans are eligible for this program. Your monthly payment is set at 10% of your discretionary income (adjusted gross income minus 150% of the federal poverty line in your state for your family size). The payments count towards public service loan forgiveness (PSLF).
There are two big differences between PAYE and REPAYE that affected our decision to get married. The first is the REPAYE interest subsidy (only available with REPAYE). The federal government will subsidize 50% the difference between your monthly payment and the amount of interest that your loans are accruing. For example, someone like me with a $215,000 consolidation loan at 5.4% that is accruing $967 in interest per month (!!!), has a calculated monthly payment of $111 (My first 6 months of salary as an intern was $33k, and your payment is based on your previous year's tax return – make sure to submit a tax return as a 4th year student to take advantage of several months of $0 payments!). The difference between the interest I accrue is $967-$111 = $856. So, for being on the REPAYE program, the federal government will contribute 50% of that difference to my monthly payment, so I get $856/2 = $428 in free payments towards my loans every month. This makes my effective interest rate on my loans this year 3%. Next year when my payments get calculated on a full year's salary, my monthly payment will be about $391, making my subsidy $967-$391 = $576 / 2 = $288 free dollars for an effective rate of 3.8%. This is huge and basically turns my loans into almost free money for the duration of residency while I have this subsidy (given inflation).
Thousands More in Subsidy Dollars Available If I'm NOT Married
Difference number 2, and the reason why all of the above is important, is that REPAYE is the only student loan program that also takes into account your spouse's income when calculating your monthly payment. The determination of married is based on your federal tax filing status, and both “married filing together” and “married filing separately” count as married for the purposes of REPAYE. So, if I were federally married this year my monthly payment would be $351 instead of $111 (remember it's not exactly linear because it's 10% of AGI minus 150% of federal poverty line), and next year my payment would be $880 (or $933 depending on if filing jointly or separately) per month! Ouch. So not only would I have less money in my pocket from the higher monthly payments, but the free government money that is going towards my loans would also essentially disappear. And I'm the only one with federal loans! If we both had federal loans, the impact of this would double because we'd both have to pay this! Over the course of my 5 year residency, this would equate to several thousands of dollars in lost income, lost compound interest (both positive in retirement accounts and negative in increased loan burden), and lost quality of life from having a tighter budget.
Marriage Tax Penalty
When I initially wrote this article (and when we made our decision to not file legal paperwork), the second half of the post focused on the effects of the marriage tax penalty. This has been written about ad nauseam around the internet, but to touch on it briefly, the federal tax income brackets were structured such that dual-income households above a certain income threshold wind up paying significantly more in taxes. This affects both “married filing separately” and “married filing jointly” households. Previously, this was enormous, and for a two physician household could easily be on the order of $10-25k extra in taxes per year. With the new tax law, as of 2018 this has actually been largely eradicated. Since most physicians will fall into the 35% bracket for income between $200k-500k, you don’t get pushed up into the 37% bracket until your combined taxable income is $600k or more, and even then it’s only 2% more on dollars earned above $600k. Likely just a few grand at most unless you are a really high earning physician couple.
“Married”, But Not Missing Out on Free Student Loan Money
Just to be clear, nothing about the above changes the fact my wife and I are truly married. We both wear a ring every day to remind ourselves of the commitment we made and the love we share. Our relationship is the most important thing in the world to us. We live together, we share everything. To everyone that knows us, we are husband and wife. Nothing about our federal income tax filing status changes that. The only people who know about this situation besides the two of us is our respective parents, who were understandably hesitant at first, but once we broke down the numbers for them they understood our decision. It was hard for us when we made the realization too, but it is even harder for us on a resident salary to justify missing out on thousands of dollars per year worth of free money towards my loans.
We got married at a time that was socially and emotionally right for us, and we weren't about to let some loan program fine print get in the way of what we wanted. And of course, this is far from the only thing we're doing to keep our personal finances in check – we rent in a cheaper than average apartment that's walking distance from our hospital, we don't own a car and just use Uber/Lyft or Zipcar (an on-demand car share service) to get around a few times a month that we actually need it (car payment + insurance + maintenance + gas + parking would be hundreds of dollars more per month than we spend on hopping in a car and being driven around), we hold off on luxury purchases as much as possible (my obsession with researching the sustainability, quality, and longevity of everything I buy helps slow down impulse purchasing), we cook when we can, and with all of this together we're managing to put away about 30% of our take-home income towards retirement savings as PGY2 residents in a high cost of living area.
The Future of Our Marriage Status
Of course, marriage is not just a tax bracket. There are legal, social, and emotional aspects to being officially married. We are acutely aware of this and are still working on the best solution to it, which is part of my inspiration to writing this post as I would like to ask WCI readers what their suggested solutions are! So far, we have 3 possibilities:
- Hire a lawyer to write up a contract that would basically give us as many of the legal protections of marriage as possible – this of course costs time and money
- Get a civil union or domestic partnership in one of the states that still allow them (many states did away with them when marriage equality became federal law a few years back), which gets legally recognized in the state that we reside in as a marriage. We'd then be legally married at the state level but not the federal level.
- Is a new one now that the marriage tax penalty is basically gone – just wait until after residency to get legally married. All the loan benefits (since we’ll be really aggressive with loans and wouldn’t qualify for the interest assistance on REPAYE anyway), and just a few years of putting off the legal benefits.
For now, I think we’ll just stick to option 3, and enjoy our wonderful new marriage with a little bit less financial stress during residency!
What advice do you have for this young doc? Do you think he made the best decision? Why or why not? Comment below!