By Andrew Paulson, CSLP, Lead Student Loan Consultant and Co-Founder of our partner site StudentLoanAdvice.com
Tax season is upon us. Will my tax filing status change my student loan strategy? This is a common question we hear in student loan consults, particularly this time of year.
For those who are married or looking to marry within a few years, it is important to understand how your tax filing status can significantly change your student loan plan.
Traditionally, most households file their tax return using married filing jointly (MFJ) status. Below we will discuss when you should consider filing your return using married filing separately (MFS) status and how this could potentially save you hundreds to thousands of dollars in the long run.
Not interested in doing a deep dive and want an expert to help determine which filing status will save you the most money? Book a consult today!
Table of Contents
- Married Filing Jointly vs Separately
- Pros and Cons of Married Filing Jointly
- How Do Income-Driven Repayment Plans Affect Your Tax Filing Decision?
- When Should Married Couples File Taxes Separately?
- Married Filing Separately in Community Property States
- The Bottom Line: Tax Filing Status Is Integral to Maximizing Your Student Loan Plan
Married Filing Jointly vs Separately
Married couples have two options in filing their taxes, married filing jointly (MFJ) or married filing separately (MFS). In order to be eligible to file taxes as married, the couple needs to have wed before the end of the tax year. How you choose to file your taxes can greatly affect your student loan payments.
What Does Married Filing Separately Mean?
Filing taxes married filing separately means that each spouse files their taxes separately (two returns instead of one). Each return is based on that individual’s income.
What Does Married Filing Jointly Mean?
Filing taxes married filing jointly means that a single combined tax return is filed for household income.
Pros and Cons of Married Filing Jointly
Most CPAs and tax software will recommend that you file your taxes married filing jointly over married filing separately because you will pay less in taxes, you only have to file one return (instead of one for each spouse), and there are more deductions and credits.
Benefits of Married Filing Jointly
- Earned income tax credit
- American opportunity and lifetime learning education tax credits
- Exclusion or credit for adoption expenses
- Child and dependent care tax credits
Disadvantages of Married Filing Jointly
- Inability to exclude spouses income from student loan calculation
- Smaller deductions for medical costs if it exceeds 10% of adjusted gross income
Generally speaking, for dual earners with similar incomes, MFS doesn’t cause much of a tax penalty. But, for a typical household, MFJ results in less paid taxes and is more simple.
So the question is, why would I ever file my taxes married filing separately? Well, for student loans there are a couple of reasons you need to be aware of which may save you thousands of dollars. Let’s dive in.
How Do Income-Driven Repayment Plans Affect Your Tax Filing Decision?
In order to understand how filing status impacts your student loans, let's first dive into what an Income-Driven Repayment (IDR) plan is.
What Is Income-Driven Repayment?
Here are a few basic definitions and explanations about Income-Driven Repayment (IDR).
An Income-Driven Repayment plan adjusts your payment amount in a way that is to be affordable based on your current income and family size.
Income-Driven Repayment Eligibility
There are four income-driven repayment plans available to student loan borrowers. Revised pay as you earn (REPAYE), pay as you earn (PAYE), income-based repayment (IBR), and income-contingent repayment (ICR).
Income-Driven Repayment Plan Summary
Monthly Payments Required by Income-Driven Repayment Plans
Discretionary Income = Adjusted Gross Income (AGI) minus 150% of the poverty threshold for your family size (HHS Poverty Line)
- For REPAYE, PAYE, & IBR, discretionary income is the amount by which your AGI exceeds 150% of the poverty threshold for your state and family size
- For ICR, discretionary income is the amount by which your AGI exceeds the poverty threshold for your state and family size
How to Calculate Discretionary Income for Income-Driven Repayment
Family size is determined by how many children are in your home including any unborn children who will be born during the year. Children must receive more than half of their support from you to be claimed in your family size.
Poverty Threshold
The Department of Health and Human Services (HHS) poverty guidelines, which are a simplified version of the Census Bureau’s poverty thresholds used for program eligibility purposes, are the same for the 48 contiguous states and the District of Columbia. Due to the Office of Economic Opportunity administrative practices beginning in the 1966-1970 period, there are separate poverty guidelines for Alaska and for Hawaii.
When Should Married Couples File Taxes Separately?
There is much to consider when choosing your tax filing status and there is not a one-size-fits-all solution. However, it is often the case that married filing separately can save dual-income married couples a lot of money. Consider the following scenarios:
The Perez Family
Maria and Santiago Perez are newly married and pregnant with twins. Maria earns $60,000 per year as a resident and owes $500,000 in federal student loans. This is her second year in residency and she has made 1 year of IDR payments.
Santiago earns $125,000 per year as an associate orthodontist, owes $200,000 in federal student loans, and works for a private practice. He is two years out of residency and has made 5 years of IDR payments.
Maria is interested in going for PSLF and could possibly receive it in 9 years. Santiago hopes to buy into a practice but realizes that this would involve a practice loan, which would mean additional debt. Maria and Santiago are feeling overwhelmed about raising kids with $700,000 in student loans plus the practice loan that Santiago will need.
Let’s walk through four IDR scenarios to demonstrate a few tricks and how to save them money!
Scenario 1 MFJ – REPAYE or PAYE
AGI: Maria: $60,000, Santiago: $125,000 = $185,000
Tax Filing: Married Filing Jointly
Status: Married, 2 children (twins born this year)
Poverty Guideline = $26,500
IDR Plan: REPAYE or PAYE (10% of Joint Discretionary Income)
Discretionary Income: $185,000 – ($26,500 x 1.5) = $145,250
- Attributed monthly to Maria’s loans ($145,250 x 10% / 12) x 71% = $865
- Attributed monthly to Santiago’s loans ($145,250 x 10% / 12) x 29%= $346
- Household monthly payment $145,250 x 10% / 12 = $1,210
Note, Maria’s loans are 71% of the overall loan balance and Santiago’s are 29% which is how monthly payments are attributed to their loans.
Annually $14,525 would be paid on their loans. With $10,375 applied to Maria’s and $4,150 to Santiago’s. Seems a bit counterintuitive as Santiago is making more money and more is allocated to Maria’s loans. It’s important to remember when filing taxes MFJ, they calculate your portion of the loan payment based upon your % of household student loans.
Negative Amortization Student Loans
Another important point is that in Revised Pay As You Earn (REPAYE), if your monthly payments don't cover the monthly interest accrual, 50% of the unpaid interest is covered by an interest subsidy. The technical term for this is called negative amortization. The overall student loan balance grows more slowly if you're enrolled in REPAYE during negative amortization.
Using our example, $700,000 in loans at a 6% interest rate grows at a rate of $42,000 per year. $14,525 is their required annual student loan payment leaving $27,475 in accrued unpaid interest for the year. 1/2 of this unpaid interest ($13,737.50) is paid for by a government subsidy. Calculations below:
- Annual Accrued Interest: $700,000 x 6% = $42,000
- Unpaid Accrued Interest After Student Loan Payment: $42,000 – $14,525 = $27,475
- Unpaid Accrued Interest After Government Subsidy: $27,475 X .5 = $13,737.50
- Outstanding Loan Balance: $700,000 + $13,737.50 = $713,737.50
Let’s look at how much they would be paying if they use MFS.
Scenario 2 MFS – PAYE
Maria and Santiago Perez both enroll in PAYE and file using MFS status. This allows them to exclude each other’s income from their student loan calculation. An added bonus is the poverty line deduction for their household of four is deducted from each of their individual discretionary income calculations.
AGI: Maria: $60,000, Santiago: $125,000
Tax Filing: Married Filing Separately
Status: Married, 2 children (twins born this year)
Poverty Guideline = $26,500
IDR Plan: PAYE (10% of Discretionary Income)
- Maria $60,000 – ($26,500 x 1.5) = $20,250
- Santiago $125,000 – ($26,500 x 1.5) = $85,250
- Maria’s monthly payment $20,250 x 10% / 12 = $169
- Santiago’s monthly payment $85,250 x 10% / 12 = $710
- Total monthly payment $169 + $710 = $879
Filing taxes MFS reduces their overall monthly payment by $331 per month compared to MFJ. This is an annual savings of $3,972.
Keep in mind, annual taxes paid would increase by approximately $1,000 ($83 per month) for the year by filing MFS. But, the net savings is $2,972 a year.
The overall cost savings is a critical calculation for each client to help them decide if MFS is most advantageous for their situation:
Scenario 2 Annual savings in student loans ($3,972) – increased tax burden ($1,000) = Overall cost savings ($2,972)
Scenario 3 MFS – PAYE/REPAYE
Maria and Santiago Perez file taxes MFS. Maria enrolls in PAYE and Santiago in REPAYE. Maria’s monthly payment will be the same as above ($169). We already calculated Santiago’s payment as well in the MFJ example above. In the calculations we’ll show a nuanced loophole that can reduce their payment.
AGI: Maria: $60,000, Santiago: $125,000
Tax Filing: Married Filing Separately
Status: Married, 2 children (twins born this year)
Poverty Guideline = $26,500
- Maria enrolls in PAYE (Payment is 10% of Her Discretionary Income)
- Santiago enrolls in REPAYE (Payment is 10% of Joint Discretionary Income)
- Maria $60,000 – ($26,500 x 1.5) = $20,250
- Santiago $125,000 + $60,000 – ($26,500 x 1.5) = $145,250
- Maria’s monthly payment $20,250 x 10% / 12 = $169
- Santiago’s monthly payment ($145,250 x 10% / 12) x 29% = $346
- Total monthly payment $169 + $346 = $629
Recall with REPAYE, you ALWAYS look at joint discretionary income regardless of tax filing status. With Santiago enrolled in REPAYE, his student loan payment is calculated from their joint discretionary income. However, he’s only held liable to his portion of the household student loan debt, which is 29%.
Essentially, 29% of the REPAYE monthly payment is due from Santiago. The other 71% isn’t charged to Maria because she’s in PAYE. Effectively creating a shield to block higher payment for Maria.
Scenario 3 would put an extra $7,340 in the Perez’s pocket annually.
Time to take a quick break on scenarios.
Married Filing Separately in a Community Property State
The scenarios above are for couples in common law states. If you live in California, Texas, Arizona, New Mexico, Louisiana, Nevada, Idaho, Washington, or Wisconsin you’re in a community property state. Couples in community property states who file taxes MFS have an even GREATER opportunity to lower their monthly student loan payment.
The main reason is how the IRS calculates your AGI. Unlike common law states, community property AGI isn’t the sum of both of your incomes. Instead, they equalize your income by summing your incomes together and divide it in half.
With a reduced household AGI you can expect a lower monthly payment for the higher-earning spouse. On the flip side, this raises the AGI for the lower-earning spouses and increases that portion of the monthly payment. Sounds like an overall wash for student loan payments as the high earner pays less and low earner pays more.
But wait, here’s the trick to help the lower earner keep a low payment. Next time you recertify your income use alternative documentation of income (pay stub) instead of your most recent tax return. They will base your student loan payment solely off your pay stub or income, thereby reducing your monthly student loan payment.
Here’s an example.
Scenario 4 MFS PAYE/REPAYE in a Community Property State
Let’s suppose Maria and Santiago Perez were living in Wisconsin, a community property state, filed taxes MFS and enrolled in IDR with Maria in PAYE and Santiago in REPAYE. There’s another loophole here, so pay close attention.
AGI: Maria: $60,000, Santiago: $125,000
Tax Filing: Married Filing Separately
Status: Married, 2 children (twins born this year)
Poverty Guideline = $26,500
- Maria enrolls in PAYE (10% of Her Discretionary Income)
- Santiago enrolls in REPAYE (10% of Joint Discretionary Income)
Community Property: Maria AGI $60,000 + Santiago AGI $125,000 = $185,000 / 2 = $92,500
- Maria $60,000 – ($26,500 x 1.5) = $20,250
- Santiago $92,500 + $60,000 – ($26,500 x 1.5) = $112,750
- Maria’s monthly payment $20,250 x 10% / 12 = $169
- Santiago’s monthly payment ($112,750 x 10% / 12) x 29% = $268
- Total monthly payment $169 + $268 = $437
Living in a community property state has reduced Santiago’s AGI. The reason is that in community property states, the law equalizes spousal income, allowing Santiago’s income to drop from $125,000 to $92,500. Higher earning spouses in community property states can take advantage of lower student loan payments.
If Maria’s AGI was based on her tax return, her AGI would actually increase from $60,000 to $92,500, effectively increasing her discretionary income and student loan payment. We get around this by having her enroll in PAYE and submit income recertification with alternative documentation of income. Which allows her to report current income of $60,000 versus the $92,500 she’d report if using her tax return.
Scenario 4 annual savings in student loans ($9,276) – increased tax burden ($1,000) = Cash savings ($8,276)
The Bottom Line: Tax Filing Status Is Integral to Maximizing Your Student Loan Plan
Here's a flowchart to summarize what we've discussed and to help you quickly identify if married filing jointly or married filing separately is right for your situation.
Wow, we covered a lot of ground and just scratched the surface on how integral tax filing status is to your overall student loan plan and finances. Student loan repayment options are tricky for dual-income married couples, but you can see that by paying close attention to nuanced details, you can save a significant amount of money.
Every couple's situation is unique, and if you're still wondering what the right filing status is to reduce your student loan payments, our student loan consultants are ready to help. Our team of experts will guide you through all your options to tackle your student debt and help you find your optimal student loan plan. Ready to save money and take the confusion out of your student loans? Book a Consult with our student loan experts today.
I understand why Maria would want to do this if she is going for loan forgiveness, but why would Santiago want to pay so little and accumulate more interest on his loans which will compound over years? Even if he continues IDR at some point his payments would be a lot higher once he has his own practice and his wife is an attending. Would he still hope to come out ahead doing the IDR for 20-25 years? If he ever decided he wanted to pay off his student loans, now he has all of that accumulated and compounded interest to also pay off. I also just don’t understand why a high earning professional would want to stretch out 200k of loans for 20-25 years. I also think it’s it’s worth it to live like a resident for a few years and just pay those loans off as quickly as possible. Best decision I ever made and was a huge weight off my shoulders, but I am also very debt averse.
Kelly this is a great point.
The point of this article is to demonstrate for dual earning couples both with loans how crucial it is to select the right repayment plan and tax filing status.
For most borrowers extending debt out 20-25 years is not the best scenario. Usual recommendations are:
-Live like a resident = pay off loans in 2-5 years or
-Go for PSLF
For Santiago, PSLF is likely not an option and he has a low debt to income ratio. He should just live like a resident and pay his loans off as soon as possible. Maria on the other hand, has the option to do PSLF and has a high debt to income ratio (assuming lower paying specialty).
Those with higher debt to income ratios tend to benefit more from PSLF. But at the end of the day, Maria would need to run the numbers to determine her plan forward. And it depends on her risk tolerance with debt.
I actually lean more toward your point of view for anyone without an obscene debt to income ratio, but the numbers are what they are given the federal IDR and forgiveness programs.
“Disadvantages of Married Filing Jointly
There are a few downsides to consider for married couples filing taxes using MFJ status such as a:
-Smaller IRA contribution deduction
-Lack of student loan interest deduction
-Smaller standard deduction
-Smaller capital loss deduction limit”
I’m so confused by these statements.
A married couple is entitled to exactly the same total standard deduction whether filing one MFJ return or two MFS returns, right?
For married couples, the student loan interest deduction is ONLY available to MFJ filers (not MFS filers), right?
Nicholas, thanks for pointing this out. We fixed this.
1.) In 2020 a married couple MFJ can take a standard deduction of $24,800. For MFS taxpayers, you only receive half the standard deduction ($12,400).
2.) Correct, only available to MFJ filers.
Yes when you add them together. But I could craft a few situations where it could matter I suspect.
Definitely should give credit to the original source: http://www.studentloanplanner.com
Great Post! I have a couple questions…
1) Are you sure that if you file separately that both spouses are allowed to claim a family size of 4? Does the department of education offer any guidance on this? It seems a little dishonest. I think the form asks something like (How many children receive more than half of their support from you?) Can both spouses in a family of 4 really honestly answer “2” if they are filing their taxes separately?
2) How are you calculating the difference in taxes owed in MFJ vs. MFS. This can become very complicated to figure out, especially if both spouses work and they don’t make the same amount. It seems silly to gloss over this because in a lot of cases the benefits in paying less under IDR plans would be offset by paying more in taxes.
Hi Alex,
1.) Yes. When you :
-file taxes MFS
-choose different IDRs
-both have student loans
You are both able to take a poverty line deduction equivalent with your household size. The example in the post demonstrates a poverty line deduction for a household of 4, with Santiago in REPAYE and Maria in PAYE. Both take the 26.5k deduction in calculating their student loans.
However, on your tax return when MFS, only one of you can claim the children as exemptions on your tax return. Usually, the parent who lives with the child for more than half of the year claims the child as a dependent on her return.
2.) I’d definitely work with a CPA or tax advisor on the costs of MFS or MFJ. There are a number of calculators out there that can give you an idea in how much extra you would pay MFS. Here’s an easy one to use.
https://tpc-marriage-calculator.urban.org/
Is it possible to file MFS and have your payments certified for PSLF and then refile your taxes two years later as MFJ?
Hi Andrew,
Yes it is. As long as you are following the PSLF rules of:
1. Qualifying employment
2. Full-time work
3. Qualifying repayment plan
4. 120 qualifying payments
You can amend your MFS return to MFJ up to 3 years after you have filed them. This would allow smaller student loan payments while in IDR, PSLF payment count and recoup some of the tax penalties you paid when MFS.
However, the likelihood of a tax audit doubles when you do so. So if you go for PSLF and file taxes MFS each year and then amend your return to MFJ each year for 10 years straight, they are likely going to understand you’re completely gaming the system to pay less in student loans and less in taxes.
Sorry, this may be a basic question. In this instance, you are talking about amending previously submitted tax returns correct? I want to make sure I am not doing anything wrong by filing MFS for the next few years then switching back to MFJ after finishing residency. I would not be amending previously submitted returns, just trying to keep student loan payments at a minimum during residency.
Thanks.
Hi Jeremy,
Correct. I’m talking about amending previously filed returns from MFS to MFJ.
There is nothing wrong with filing taxes MFS for two years and then starting to file MFJ if it fits best in your plan. This is common for those who do IDR during residency and then private refinance as an attending. Student loan payments are based on loan size once private refinanced and it’s no longer necessary (in most situations) to file taxes separately to separate your incomes.
You can argue the ethics of doing so, but not the legality. It seems the Department of Education does not talk to the Department of the Treasury.
“It seems the Department of Education does not talk to the Department of the Treasury.”
I have heard/seen multiple people say this when discussing the MFS/MFJ change, but I’m always confused by the statement. For example, every time that I verify my income, the servicer (fine, that’s not technically the DoE) literally goes to the IRS to say ‘what’s their tax look like!’. So the narrative is a bit perplexing to me.
Also, I don’t know that there’s evidence this is true with respect to the final step in PSLF – the audit that FedLoans will do. Do we all know EXACTLY how that audit goes or whether or not that is something that can be flagged – maybe, maybe not.
I think anyone doing this needs to understand that there is a risk that they get to the finish line and then have to suddenly answer questions they may not be comfortable answering. Who knows!
East Coast,
You are correct on the risk side. Doing PSLF is always a risk, but it’s a risk each person needs to assess for their individual situation.
I might be misunderstanding your point about the audit. But, this is not a FedLoan audit. This is the IRS who would audit taxes.
The narrative comes from a trick where you first file your taxes MFS, then make your PAYE payments based on that, and then refile your taxes 3 years later as MFJ. The IRS doesn’t tell the DOE that you refiled your taxes and as near as I can tell, you don’t have to go back and make payments as though you had filed MFJ originally.
I can’t imagine Fedloans goes back and looks at 10 years of taxes. They can’t even count to 120. There might be some risk there, but it can’t be very high. That wouldn’t be the reason I wouldn’t go for that trick. I wouldn’t do it because it feels dishonest to me.
1 How do you know that you are both able to take a poverty line deduction equivalent with your household size? Like I said, the form asks “how many children in the home get more than half of their support from you?” How can a married couple filing their taxes separately both honestly say “2” to this question? Has the department of education specifically addressed this, or are you making an assumption?
2) I realize that this is extraordinarily complicated. But when making this decision, it’s not that difficult to determine which scenario (MFS vs. MFJ) would lead to lower loan payments. It’s fairly straight forward. The challenge is to figure out how much the loan payment benefits of filing separately would be offset by the tax costs. I apologize if I’m being a jerk. I just think the most important aspect of this decision is being glossed over here.
The greater the income discrepancy between 2 spouses, the more advantageous it is to file separately if the lower earning spouse is the one going for PSLF. (This is the case in the Perez family where Santiago makes twice as much as Maria). It’s also true that the greater the income discrepancy between the 2 spouses, the higher the tax penalty will be for filing separately as opposed to filing jointly. So in many cases the benefit is offset by the tax consequences.
Hi Alex,
1.) This is how the loan servicers will treat it when you file taxes separately. Because when you submit your annual income driven certification form, the loan servicer will require you to disclose your income by attaching your tax return (or pay stub) and ask for your spouse’s return as well. Which will show them how large your household size. And they would incorporate their income if you were using revised pay as you earn (REPAYE). But if you are enrolled in income based repayment (IBR), pay as you earn (PAYE) or income contingent repayment (ICR) they won’t incorporate this into calculating your discretionary income. As it will only go off your tax return or pay stub.
2.) You make a great point here. It is only worth it to file taxes MFS if the savings in student loan payments annually is more than what the increased tax penalty would be MFS over MFJ. In the situation where both spouses earn about the same amount, filing taxes MFS or MFJ shouldn’t change the tax cost much and could provide lower student loan payments MFS and more cash in their pocket.
The income difference between spouses in this post could increase the tax penalty significantly and would require review if its worth it to MFS to lower student loan payments.
1) Sorry I read this 3 times and I’m not following. I thought your family size is determined by the form you and your spouse fill out when you recertify your IDR plan. What I’m saying is that if both you and your spouse have federal loans that are in IDR plans (like the Perez family), you will both have to fill out the recertification form. The form will determine your family size by asking you some questions, including “how many children in the home get more than half of their support from you.” How can a married couple with 2 children who file separately both honestly respond “2” to this question? The kids cannot both get more than half of their support from each parent. What am I missing.
2) Yes I agree with everything you just said. I would add that if both spouses made the same amount, it’s true that filing separately wouldn’t have too big of an impact from a tax perspective. But it’s also true that if they made the same amount and both had student loans in IDR plans, there wouldn’t be a large impact on the loan payment calculation either. In fact, I think the only impact would be counting the family size twice. And as I said in point #1, I don’t understand how that could be allowed.
Hi Alex,
1.) Yes, both spouses will file an annual income driven certification form. On the form it will ask for your income to determine your payment (tax return). In addition, it will require you to attach your spouse’s tax return even if you file your taxes separately which the loan servicer uses to determine your household size. Because if you claimed one child on your tax return and your spouse claimed the other child on theirs, the loan servicer would see this and determine your household size to be four. This helpful?
I think we’re talking in circles here…
The IDR recertification form literally says “The following questions will be used to calculate your family size.” The next question is “How many children, including unborn children, are in your family and receive more than half of their support from you?”
Your answers to these questions are how the loan servicer determines your family size. It literally says it on the form.
In a family of 4, wouldn’t both spouses need to answer “2” to this question for both spouses to get to claim a family of 4 for the purposes of calculating IDR?
Hi Alex,
On the IDR recertification form both spouses get to claim the children in the family size because both spouses are providing the financial support equally, even if their incomes are not equal.
In this situation both parents would answer 2 on the form.
Would it be possible for you to show the math/results if the same couple decided NOT to get married? A friend of mine told me it was best to delay marriage during residency for tax/loan repayment reasons. It’s not relevant to me, since I’m married and out of residency, but I teach medical students and they are inquiring.
Thanks!
Andrea,
This is great idea for another post!
Short answer, and I don’t want to discourage anyone from getting married! But, if you and your SO decided to handle all of your loans before marriage it may complicate things less.
You wouldn’t need to worry about how MFS vs MFJ could factor into your situation because you file your taxes as single. The flowchart at the end of the post makes mention of this as well.
If you need help running your own numbers, consider making an appointment with Andrew at https://studentloanadvice.com/
Thank you for giving the white coats a fair shake.
Hi Tom,
Thanks for what you do. It’s the least I can do to help out you and others to better manage your student loans.
You’re welcome.
Thanks for the article, Andrew. Like Alex, I too, would like some clarification on how kids are divided (or not divided) during recertification. I understand what you’re suggesting, the loan servicer will see the couple is married via taxes and give them both HHS poverty for all the kids. My questions is, does this only work if one spouse is REPAYE in order for the loan servicer to recognize the couple is a household? If both are PAYE then you wouldn’t have to (can’t?) report your spouses income during recertification, right? Also if one spouse, in a split property state, uses pay stubs instead of a tax return how would the loan servicer tie the kids to that spouse? Would they lose the poverty guideline because they aren’t reporting a tax return? Thanks.
Hi Michael,
It would work on whichever IDR plan you select as long as you file your taxes separately. How you document your income, as a tax return or pay stub, shouldn’t impact your HHS poverty line deduction.
Reiterating what I responded earlier, on the IDR recertification form both spouses get to claim the children in the family size because both spouses are providing the financial support equally, even if their incomes are not equal.
If filing MFS, can spouses file from different states? (Living separately)
Hi Sue,
I believe they can. State tax returns are usually filed based on the state where your income is earned. But, I’d make sure to read up on your state rules for you and your spouse and how your income is taxed.
Might be worth it to ask a CPA or tax advisor in your particular situation.
Sure, why not?
Quick question, how does it work if you have one spouse on an IDR plan going for loan forgiveness (REPAYE with 350K in loans) and another with a standard 10 year repayment plan (~1,100/mo and 100K left). My spouse choose this option for personal reasons and because she plans to take roughly 5 years off when we start having children. Does the household student debt split up the same if the payment plans are different?
Thanks
Hi Blake,
In this situation, you would look at your household federal loans to calculate your payment.
Total household federal student loans = 100k + 350k = 450k
You –> 350k = 78% of household debt
Spouse –> 100k = 22% of household debt
Your spouse’s payment will stay at the 1100 p/mo if she stays in the standard 10 year repayment plan. Your loan payment will be based on your household income and then take into consideration your portion of the household debt.
For example: Let’s say your monthly discretionary income is $5,000, your REPAYE monthly payment would be $500 (if you were both enrolled in REPAYE). Since you’re only enrolled in REPAYE your payment would be $500 * 78% = $390.
If she were to private refinance, you would become 100% of household federal student loans and then your monthly payment would be calculated as 500*100% = $500.
Hey Andrew,
When submitting the last 2 paystubs is it possible to tuck away a larger amount of my income into my 403b/457 account (like $10,000) so when they calculate your AGI it is lower and my REPAYE payments with my wife are way lower? I was thinking about doing this versus submitting my annual income/yearly tax return.
Thanks
Hi Anthony,
Yes it is possible. Submit another IDR certification form and attach a paystub as income documentation. Indicate on the paystub what the gross wages, pre-tax deductions and taxable wages are (unfortunately they don’t also use your taxable wages number when they should). We want to make sure they use your taxable not gross wages in order to reduce your student loan payment.
I’m happy to send you a template letter to send to your servicer if necessary.
Andrew StudentLoanAdvice
Hi Anthony,
Yes, submit an IDR recert form and attach a payment stub as income certification. On the payment stub indicate what the gross wages, pre-tax contributions and taxable wages are for the given period. If the pay stub does indicate what the federal taxable wages are, I circle that number and draw some arrows to it, in order to help the servicer.
Servicers need to be lead by the hand or might mistake your gross wages for taxable wages.
If you need a template letter to send to your servicer, I’m happy to send you one.
Andrew StudentLoanAdvice
If an individual gets married, how does the marriage year typically get factored in given the following factors? 1) Pursuing PSLF so MFS makes a lot of sense even with the higher taxes, 2) Income for the marriage year was originally submitted for a single tax payer but now have the option to file MFJ for marriage year, 3) plan to file MFS going forward, and 4) made Roth IRA contributions in the last years so if filing MFS in marriage year, will have to make an excess withdrawal.
Good tips. Got to be careful with the Roth IRA for sure, but it basically comes down to running the numbers between PAYE/REPAYE and MFJ/MFS every year.
I’m married (filing jointly) but when I call each of our loan servicers, they seem to think the information you provided is incorrect. Our calculator comes back with a payment of about $400, but since we each have loans at different servicers, it seems like we EACH have to pay $400. My income is 80,000 and his is 10,000. My loan debt is 165,000 and his is 52,000. I’m 1 year into PSLF, if that makes a difference. However despite our varied income differences, our payment is being calculated as the same because it’s considering the household income. It hardly seems fair for us to pay a total of $800/month. If this is incorrect, how do different servicers know what the other spouse is paying?
Hi Amanda,
It’s not uncommon to have your servicer tell you contradicting information.
They should take your household income and household federal student loans into account when they calculate your monthly payment. Are you both on the REPAYE or PAYE plan?
My back of the envelope calculations would put your monthly payments as a household with REPAYE/PAYE at ~532 p/ month. If you are both in IBR the monthly payment is ~800.
You might be in the IBR plan. I would switch over to the PAYE/REPAYE to have a lower monthly payment.
Andrew SLA
I’m not sure what information you’re saying is incorrect.
You’re filing jointly. You have to file separately to have them look at your income separately. If you’re filing separately, then there will be two separate payments.
Using a REPAYE calculator, I see an income of $90K and a student loan debt of $217K works out to a total payment of $547/month. Whether that’s fair or not is in the eye of the beholder.
Hello,
Thank you so much!
This information was incredibly helpful.
Could you please advise for my situation??
We live in a community state and currently file jointly.
My husband is still paying his student loans under REPAYE.
I took out a significant amount in Parent Plus loans to put our 2 kids through college and will be paying mine back under ICR, the only option available at this time.
I only work part time now due to rheumatoid arthritis, and make less than 20K.
My husband makes 135K.
Do you think MFS would work best for us as well?
Right now, ICR TAKE 20% of our combined income and REPAYE takes 10%…. Which means we’re paying 30% of our combined income in student loans.
My husband has already paid 3X what he borrowed, and I know I’ll probably be paying my parent loans for the rest of my life, so I’m trying to look at all options available as we won’t be able to sustain payments this high for very long.
ICR only takes into account my income, correct?
But how does this work in a community state?
I wonder if you were on the same program if it would only be 10%. You might consider meeting with our folks at studentloanadvice.com given your extremely complicated student loan situation.
Are you allowed to change your tax filing status every year which will change your student loan payment every year ?
i.e. We were thinking to MSJ this year since the Student loan pause is till June, and take advantage of the tax benefits of MFJ, and then next year think about filing separately to lower payment.
Yes.
Thank you for this great and detailed post!
What if I am further along in my career and the calculated monthly payment I would have when filing separately is greater than the standard repayment amount? My wife makes significantly less than I do but still a substantial amount. Am I correct in saying that there is no benefit to MFS as I would anyway be paying the max amount (which would be the standard repayment amount, if I am correct) so I might as well get the tax benefits of filing MFJ?
I can provide specifics if this is unclear! Thank you!
Josh,
You are likely correct if you are in the PAYE or IBR program. There is a payment ceiling that occurs at the standard 10 year payment amount. If you make more than you owe, there is a potential you run into the cap regardless of your tax filing and would be better off MFJ.
I want to clarify your point on standard repayment. Standard repayment can mean different things to different borrowers. We all assume it just means the standard 10 year repayment plan. And, if it does for you and it’s cheaper than an IDR option, then go for it. However, if you consolidated your student loans after school and consolidated more than 7.5k in student loans your standard repayment plan would be longer than 10 years. In this case, the standard repayment plan is longer than a 10 year term and would not qualify for PSLF. Which means you’d need to be in an IDR plan such as REPAYE, PAYE, IBR or ICR instead of the standard repayment plan to qualify.
Andrew SLA
You just have to run the numbers. If you’re going to get an additional $20K forgiven for filing MFS but it costs you an extra $10K in tax, then you’re coming out ahead. But the opposite could easily be true. Generalizations and rules of thumb can break down pretty easily here. Obviously, the less you make of the household income, the better a deal MFS is if you’re the one with the student loans. The classic situation is a resident going for PSLF with an attending spouse. That’s a pretty good recipe for MFS.
Thank you for those responses, Andrew and TWCI!
Re Andrew: Yes I’m in PAYE and all federal loans and never consolidated. So I think that makes sense.
Re TWCI/Andrew:
I guess I don’t really understand what the benefit is of filing jointly at all in my situation. No kids, not eligible for EITC/American Ed credits due to both of our incomes above the amount. My wife isn’t applying for PSFL at all due to likely not going to be in workforce for 10 yrs. Is there any benefit of MFJ? (or for that matter of MFS – seems like almost 6 of one and half-a-dozen of another, in which case maybe I should just stick to MFS in order to have a similar return/income to previous years when I was single and less paperwork?)
Thank you again!
Josh,
MFJ is the default filing status for most couples. Usually, it is best way to file for couples file due to a number of tax breaks. MFS is usually more costly due to less deductions/credits, a slightly higher tax rate, etc.
The reason why a couple would file taxes separately (in most cases) is to reduce their monthly payments for IDR and maximize forgiveness. If you are doing a loan forgiveness program, then IDR and MFS is something you should look into and you’ll need to run the numbers. If you aren’t doing a loan forgiveness program, then you shouldn’t be worrying about MFS vs MFJ. In that case, I’d just pick a monthly payment you are comfortable with and start paying them down (when the pause goes away).
Andrew SLA
Usually people pay less tax filing MFJ than MFS, but it’s easy with tax software to see the difference. It’s one click of the button. That’s the advantage.
I already filed jointly this year, my spouse has a similar income, what is the best route to reduce my monthly payments?
When can I fix this mistake? Will this occur when I file taxes next in April?
Dan,
You can’t amend a tax return filed jointly to married filing separately after the tax filing deadline. Next year when you file taxes you can file separately and recertify your income to lower your student loan monthly payment. This sounds like it will be the most cost effective option for you. Aside from this, you can contribute to pre-tax accounts like a 401k/403b to lower your monthly student loan payments as well.
If you were in a repayment plan prior to covid you won’t have to recertify your income until next year. So, you might not have to even use the 2022 taxes for student loan purposes at all.
Andrew SLA
You can refile past taxes but I don’t know that will help until your next income certification.