[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!
To each his own, I guess. I give the side eye to this for two reasons, though:
1) As a spouse who supported my husband through med school on my income and is now raising our kids as we live on one resident income…how nice for you to exempt yourself from the costs the rest of us are expected to incur?
2) In this particular scenario, both parties pretty much have an equal amount to lose if things don’t work out. However, I would really hate to see a couple in other situations make this choice–namely one similar to ours in which one (non?) spouse was heavily financing the education of another with their own career or when a (non?) spouse has reduced or given up their ability to make an income because of the medical training path of their partner (although I guess there is no point in not getting married if you are going this route). I’ve seen more than one marriage break up at training. I’d want those spouses to have legal protections if it did happen.
So, with the government subsidizing half of your remaining interest payment, what happens to the rest of the interest due? Is it capitalizing? Given the two of you have a combined income of over 100K, it is not clear to me that you are making the best long term decision in how to handle your loans unless you are going for PSLF. I would like to have seen a long term comparison of how much you pay in the different scenarios of married or not, REPAYE vs PAYE vs IBR vs Standard repayment. That analysis would be more interesting to me. This article read like buying a car and only caring about the monthly payment and not the total paid. Can you share if you have done the analysis of total paid long term in various scenarios?
The marriage issue is clickbaity for sure. But the article was far too light on the finance to me.
Getting the maximum subsidy out of REPAYE helps not only if you are going for PSLF, but also if you are planning to pay back your loans. There is nothing to argue or compare or analyze there. Even if you are going to pay back your loans, you likely can’t refinance your federal loans as a resident to a rate lower than than your effective rate under REPAYE. And if you’re not sure about PSLF, you certainly don’t want to refinance.
The government covers half the interest they aren’t paying. So the rest is capitalizing? On 100K income with 215K loan at 5.4%, I would seriously think about living on one income and using the other to start a 10 year repayment plan. But in that case I would want the full on marriage commitment. YMMV.
Yes, the rest is being added on to the amount owed. Most residents finish residency owing more than they started with. Whether/when it technically capitalizes, I’m not 100% sure.
I’m not sure you understand how much debt current graduates have. The monthly payment on a 10 year repayment plan at 7% for a $400K loan burden is $4745. That’s more than a resident makes before taxes.
Most residents literally cannot even cover the interest on their debt if they wanted to. Even $200K at 6% is $1000 a month in interest alone. That’s a tough sell when your take home might be $3K.
I’m not talking about all residents. Just the example in this post.
It doesn’t capitalize until they change loan status. Thanks for moralizing without understanding the scenario.
So, a wedding isn’t real unless the gov’t says so. You realize millions have lived life long committed relationships and built families without a marriage license from the man, and that millions get the paper only for it to emerge sometime later they weren’t committed and the relationship dies, right? The farce here isn’t what you think it is.
My husband and I lived together for 7 years before we got married. So no moralizing about the marriage issue from me at all. I just think they are not making the best financial decision based on what is presented in the post. Based on his income of 33K in the first 6 months of residency, they have a potential income together of 132K. According to the post one has no debt and the other has 215K at 5.4%. A ten year repayment on that amount is about $2300/month which I think is totally doable on their income. Then they come out of a five year residency with less debt instead of more. It is easiest to live like a resident while you are a resident. My son and his s.o. are in a similar situation making a very different decision with how to manage their finances. Many residents live on 1 income while supporting a family. I don’t see how living on 66K and using the other 66K to wealth build by decreasing debt and investing is in any way moralizing. This post read to me like using student loans to increase your lifestyle in residency which by the author’s own admission they are doing.
Just to reiterate since jz confused me with the poster named, Mom, above. I am not the same person and do not agree with her comments.
Interest is capitalized when a loan goes into repayment.
Residents need to request deferrals before repayment begins. Subsidized loans, the government pays the interest. Non-subsidized it accrues without interest being earned. Fellowships can be deferred as well.
The forms HAVE to be faxed in prior to ANY repayment date. One day will trigger capitalization. Contract dates are the deferral period.
There are no more subsidized loans for med school as of 2012.
Number 3 works for me. Today that legal piece of paper means little to nothing related to your real relationship. That is what counts, not some legal fiction.
No offense intended. Some people think the same about different legal fictions. Marriage license, medical license, law license, drivers license or even a license to steal. Geez, pieces of paper don’t mean a damn anyway.
EXCEPT a license comes with responsibility too.
Some of it is financial to third parties. Assets of a legally married couple are exposed. Non-married would protect the other partner. Every credit card, every check and every liability in effect you are a co-signer whether you agreed or not. That little piece of paper has extreme significance legally.
Any third party that deals with you under the impression that you are married has been defrauded legally. Credentials matter to the other people for reasons, not to the holder that holds them, to others. If you were to die in a wrongful death, your legal wife would have a claim.
Not getting a license is not an insignificant piece of paper. You can practice marriage just as you practice medicine. Transparent, honest, in good faith or cut every corner you can legally. Personal choice. It’s called ethics. It’s a personal choice.
I sure hope next time I fly the pilot has one of those meaningless licenses. It’s more than you and your partner.
1. Kudos to WCI for running this post. I know it is tough for him to promote alternative to traditional marriage
2. I am surprised at all the posters clutching their pearls about this obviously rational move. Any loss to the taxpayer is dwarfed by the tax avoidance strategies used by corporate America. How many of us work for “not-for-profit” institutions that act like private corporations in maximizing profit and pay their leaders millions every year
3. If anyone is to blame it is our government for putting a system in place that encourages people who want to get married not to. Incentives matter!
FWIW, happily married for 23 years.
Democracy and capitalism are messy. From what I know it’s always because of human nature. Think back on politics and commerce during the industrial revolution.
Non-profit does NOT mean charity of even “good intentions “. It is tax exempt entity within a set of rules. Money comes in and money goes out. It’s a business that doesn’t pay taxes.
Kind of like 23 years of marriage, whatever comes in the wife spends according to the rules she decides. Congratulations!
The government has created horrible incentives that any rational person would take advantage of. The author should want to remain anonymous because of the superstitious people who would judge him like many commenters above.
The real crime here is that this program is essentially subsidizing and helping to escalate the enormous private-school tuitions. We are all paying for it. Don’t hate the player, hate the game. Better yet, change the game.
Agree with this. While arguments can be made that what the author did is wrong it distracts from the real injustice which is sky-high tuition and interest rates that saddle individuals who will ultimately bring great value to society. That’s where we should be directing our moral outrage. I feel sorry more than anything that the author felt compelled to avoid legal marriage because of the sheer weight of his student debt. Anyone outside the US would be baffled that this is what it’s come to in a society as wealthy as ours.
Excellent point.
I’m not sure superstitious means what you think it means.
I know several couples who got legally married for benefits reasons (e.g. military mortgage, visa status) while delaying the social wedding for a few months to accommodate schedules (e.g. resident vacation slots, other family things). This just seems like the opposite approach, and on a VERY delayed schedule.
I wonder if this would be so inflammatory if the OP had indicated that they 100% intend to file the legal paperwork at the end of residency, essentially option 3. The fact that they are considering being indefinitely engaged, while presenting themselves to the world as married, is what raises everyone’s heckles.
Exactly. Keeping “secrets” regarding a public declaration of vows seems like a trick play at the goal line. By no means to they have an obligation to broadcast the fact. Personal financial planning is sufficient. Seems like some say, the penalty isn’t real.
I wonder if they check it out and head to the courthouse.
I was curious about this strategy before and based on the internet searches I did when investigating the marriage penalty, I was convinced that in an audit situation, for definition of marriage, the IRS would look at whether you were living your life and holding yourself up as married, not whether you had a piece of paper… The IRS would look at whether you had a ceremony, whether you introduce yourselves to people as husband/wife, whether you bank together, whether you live together and share expenses, whether you’ve listed each other as benefactors on 401k, etc…
Now that I look at it again, I may have come to this conclusion based on the states that have “common-law” marriage rules.
This article discusses new IRS regulations and does apparently discuss other civil unions designed to allow people to continue receiving previous marriage social security benefits, so maybe it is legal…
https://www.lexology.com/library/detail.aspx?g=00e9cf1b-ddd2-46e2-bac4-f316627a38f7
(Not a lawyer, not a tax professional)
I tried to convince my significant other to do this same thing for the REPAYE benefits and was strongly voted down. I still wish we had done exactly as you had and left the legal portion of our marriage till after all the benefits of REPAYE were done.
Carry that out to its logical conclusion…there may ALWAYS be a benefit to not being legally married. Would you delay indefinitely? Or get divorced and remarried every few years depending on your calculations?
REPAYE borrowers who cannot get married need to band together and hire a good lawyer. The PAYE vs REPAYE “rules” in this regard are blatant age discrimination. The government should be forced to demonstrate how it is in the public good to afford special consideration for the marriages of younger borrowers while excluding those provisions for older borrowers. Standing would be a breeze.
Ryan,
“New REPAYE” should fix this since it doesn’t matter when you borrowed. All you need is direct loans. “New REPAYE” would allow you to exclude spousal income under the current gov’t proposal.
https://www.whitecoatinvestor.com/changes-idr-plans-student-loans/
Andrew SLA
Keep us up to date on how it goes!