Student Loans: Should I File Jointly or Separately?

Student loans are the bane of many young professional’s existence. The numbers continue to climb, now totaling nearly $1.8 trillion of debt in the United States. College grads are often stuck trying to obtain the original huge debt, a mortgage amid higher interest rates and elevated real estate costs, while also tackling student loans which for some can be just as large as a mortgage.

Whether they are fresh out of college and looking for a job, or well established in their career, student loans can haunt borrowers for far longer than their education lasted.

In order for millennials and Generation Z to begin building their financial plan while also addressing major life events, manageable student loan repayment options are a priority. The majority of student loan debt in the U.S. is held by the federal government, roughly 93%, and such loans do offer income-driven repayment plans (IDR). Some types of federal loans that are NOT eligible for IDR include Direct PLUS loans made to parents and FFEL Plus Loans made to parents. Consolidation Loans that repaid either of these types of loans to parents are also not eligible. Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans, Stafford Subsidized and Unsubsidized Loans, and Consolidation Loans of these types that were not made to parents may all be eligible for IDR.

Income-driven repayments are based on a percentage of the borrower’s discretionary income. Simply put, the lower the borrower’s income, the lower the student loan repayment, and vice versa. However, for borrowers who are married, the income component can become more complex.

INCOME DRIVEN REPAYMENT OPTIONS

• Pay As You Earn (PAYE)

The PAYE Plan is equal to 10% of the borrower’s discretionary income. Discretionary income is the difference between the borrower’s annual adjusted gross income (AGI) and 150% of the poverty guideline for their family size and state of residence. While it varies by state, an example based on the national poverty guideline, or Federal Poverty Level (FPL), of $15,060 for an individual for someone with an AGI of $60,000 would be [$60,000-150%x$15,060= Discretionary Income of $37,410] x 10%= $3,741 annual student loan repayment, or $311 monthly. The amount of accrued interest capitalized is limited to 10% of the original principal balance at the time the borrower entered repayment.

• Income-Based Repayment (IBR)

IBR is also equal to 10% of the borrower’s discretionary income. The main difference between PAYE and IBR is that IBR does not limit the amount of interest that can be capitalized.

• Income-Contingent Repayment (ICR)

ICR is based on 20% of discretionary income, which in this case is the difference between the borrower’s AGI and 100% of the poverty guideline. ICR usually generates the highest monthly repayment of the IDR options.

• Saving on A Valuable Education (SAVE)

Formerly Revised Pay As You Earn (REPAYE), the SAVE Plan is based on 10% of discretionary income. The difference versus PAYE and IBR is that SAVE considers discretionary income to be the difference between the borrower’s AGI and 225% of the poverty guideline. In most instances, this means that SAVE yields the lowest monthly repayment.

However, a federal court issued an injunction preventing the U.S. Department of Education from implementing parts of SAVE in June 2024, which has yet to be resolved. Servicers expect payments to resume no earlier than December 2025, if SAVE is even reallowed. Most loans enrolled in SAVE are in general forbearance, meaning payments are not owed, interest is not accruing, but time spent in general forbearance does not count towards Public Service Loan Forgiveness (PSFL).

So, what does a wedding and tax filing have to do with these various repayment options? Under most income driven repayment plans, when the borrower is married filing jointly, the joint income is considered in the repayment calculation. If the borrower’s spouse is working, this typically generates a higher adjusted gross income and results in a large monthly repayment.

If the borrower’s spouse also has federal student loans, however, the borrower’s repayment will be prorated based on their share of the total balance owed. Or, the borrower can choose to file their taxes married filing separately and only consider their individual income in the calculation.

For example, a single borrower with an AGI of $60,000 and $400,000 of student loans on the PAYE Plan would be looking at a monthly payment of roughly $300. Now, if the same borrower were married filing jointly with a spouse who added a $140,000 salary to their tax return ($200,000 combined AGI), their repayment would equal about $1,400 monthly. Someone looking for a smaller monthly obligation in their budget might initially think filing separately is a no-brainer, but they must consider the tax consequences to this election.

Sticking with the same hypothetical scenario, if the borrower filed separately, their $60,000 AGI would put them in the 22% marginal tax bracket and their spouse’s $140,000 AGI would be in the 24% marginal tax bracket. Compare this to them filing jointly with a $200,000 AGI in the 22% bracket.

In most scenarios, married couples fare better tax-wise by filing jointly versus separately. However, if controlling the monthly budget and generating free cash flow is the priority, the student loan repayment savings by filing separately might outweigh a lesser tax refund. Borrowers should consult with their tax advisor on their specific situation to fully understand tax consequences and potential credits, deductions, etc.

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Bryan M. Kuderna is a Certified Financial Planner™ and the founder of Kuderna Financial Team, a New Jersey-based financial services firm.  He is the host of The Kuderna Podcast and author of ,"WHAT SHOULD I DO WITH MY MONEY?: Economic Insights to Build Wealth Amid Chaos".