Important Questions To Ask
Before tying the knot, there’s two important questions to ask a future spouse about their financial situation:
What was their adjusted gross income last year? Their AGI may be used to determine future monthly payments.
Do they have federal student loans? In most cases, the government will look at the total household federal debt and apply the percentage share to future monthly payments.*
As an example, if Lucy has $300k in federal debt and marries Steph with $100k in debt, Lucy’s share is 75% of the total burden ($300k / $400k). Both their incomes are used to determine the couple’s income-driven payment and multiplied by 0.75 for “Lucy’s share”, regardless of whether Steph is even on an income-driven plan.
Two Crucial Rules
There’s two important rules to keep in mind about income-driven plans:
- REPAYE will always use spouse AGI regardless of tax filing status.
- REPAYE has no monthly payment cap. Income spikes always affect the monthly payments on this plan.
While REPAYE has great subsidizing features when loans are negatively amortizing, it can be a real drag for folks who want to get married.
The other main income-driven plans — PAYE and IBR — both have monthly payment caps and allow the borrower to not include spouse income or federal debt if they filing taxes separately. It’s a good idea to consider these plans for borrowers who are planning to get married down the line.
Estimating Future Monthly Payments for Married Student Loan Borrowers
There are a myriad of complex rules determining how monthly payments are calculated for married borrowers on income-driven repayment plans.
Luckily, we’ve made it super simple for financial advisors using Payitoff to estimate changes to a borrower’s income-driven monthly payments over time.
Situation #1: Already Married
For folks who are already married, you can easily connect spouse accounts by creating a separate client, linking them and including the spouse’s current AGI.
Let’s say Lucy and Steph are already married. For this case, we can link Steph’s account and AGI from the Client Information tab:
Monthly payments automatically factor in the spouse’s federal loans and AGI:
Given their combined AGI ($107k), Lucy’s monthly payment in Feb 2020 under REPAYE should technically be $772.66. Since Lucy has 75% of the federal debt in the household, her monthly payment ends up being $579.50.
Situation #2: Getting Married
For single clients on income-driven plans, you can also show how getting married in the future will affect their monthly payment.
Let’s say that Lucy and Steph are planning to get married this year (2019). Lucy has graduate loans, files taxes as single and is currently 5 years into the REPAYE repayment plan.
Here are her income-driven options assuming annual AGI growth of 4%:
It looks like her current plan will cost $92,292.60 in monthly payments and incur a federal tax bomb at forgiveness of $106,027.40, bringing her total nominal cost on REPAYE to $198,320.
Since they’re planning to get married this year, their change in filing status will affect monthly payments in 2020 (the subsequent year). Let’s jump into the REPAYE timeline and add some new future scenarios to account for this.
We’ll change their tax filing status to married filing jointly and include a future spouse AGI of $50k in 2020 to see what happens to her payments.
There’s definitely a spike in monthly payments, moving from $243.19 to $567 on REPAYE. This changes the total cost of her plan from $198,320 to $299,254.45, an increase of $100,934.45!
That’s pricier than any wedding I’ve been to 💒
Filing their taxes separately won’t help her on REPAYE, since Steph’s AGI and federal debt will be included either way (see rule #1 above).
Let’s see what else we can do.
Situation #3: Spouse Gets A Promotion
What if Steph is a doctor in a fellowship and her AGI jumps to $400,000 on her 2022 tax return?
Whoa! What a big spike! Lucy’s monthly payments have gone from $616.42 in 2022 to $2,791.47 in 2023.
The total cost of REPAYE is now $559,892.00 and she can’t take advantage of forgiveness since the high monthly payments actually repay the full debt before the term is over.
We may want to consider having Lucy enter PAYE so we can take advantage of the monthly payment cap (see rule #2 above).
On PAYE, the total cost is $514,873.90, her monthly payment caps off at $3,451.63 in 2030 and Lucy can take advantage of forgiveness. Her payments still jump in 2023, but she has a ceiling on how high her payments can go.
As long as she switches plans before the income jump happens, Lucy will meet partial financial hardship requirements and save $45,018.10 on PAYE.
Situation #4: Filing Taxes Separately vs. Jointly
Lucy and Steph want to see whether the cost to filing taxes separately is worth the savings they’ll see in their student loan payments. You can now tell them!
Let’s say Lucy wants to compare the cost of PAYE vs. REPAYE if they filed taxes separately when they get married.
You can remove any future scenarios by selecting the “x” next to each one:
On PAYE, her total cost is changes from $514,873.90 to $217,160.53, saving $297,713.37 compared to filing taxes jointly. She avoids any monthly payment jumps unless she’s expecting AGI jumps of her own.
All her income-driven options are automatically updated so you can confirm PAYE as the most affordable option given these circumstances:
Awesome! Compared to her current schedule on REPAYE, we’ve found that Lucy saves $342,731.47 by filing separately and moving to PAYE.
Now, we can have a conversation with her CPA about whether this move would make sense given their tax situation.
Situation #5: Getting Divorced
Divorce has an immense impact on income-driven repayment and it’s really important to help provide clarity in these cases.
Let’s say Lucy and Steph want to explore what a divorce would mean for Lucy’s student loan payments if they’re filing jointly and she stays on REPAYE.
If they were divorced in 2026, Lucy’s monthly payments would drop from $3,145.64 to $464.96. The total nominal cost of REPAYE changes from $559,892.00 to $341,017.49, saving her $218,874.51 as a result.
Obviously, couples are never planning on getting divorced, so this functionality is more appropriate for cases where a divorce is in progress.
Thoughts to Consider
For borrowers who are on income-driven plans, there’s another consideration to take into account:
When will their spouse pay off their federal debt?
It’s important to keep in mind that the borrower’s share of federal debt changes year over year. If their spouse is on PSLF, their federal debt is completely forgiven after 10 years. Once that happens, you can expect the borrower’s payments to increase depending on how much of their spouse’s debt is forgiven.
The same goes for refinancing. If a spouse refinances their federal debt, it is no longer taken into consideration when estimating a borrower’s income-driven monthly payment.
A lot of folks get this wrong, so make sure you always run the numbers before considering any sort of refinancing offer.
We’re still working on a way to easily account for this future scenario in Payitoff, so stay tuned 🙂
Thanks for reading this far! We hope this has been a helpful illustration of a usually massively complex situation.
If you have questions or ideas, feel free to shoot us an email!
We love love love feedback. 😃
*A spouse’s AGI and federal debt is not considered for borrowers filing taxes separately on PAYE or IBR income-driven repayment plans.