[00:00:00] Speaker A: When it comes to federal student loans, figuring out a repayment strategy is already incredibly difficult. And when you add in the fact that many student loan borrowers are married or have children, it becomes even more so. In this episode, we talk about all the complexities that come into play when determining a student loan payment strategy for a family and how some of these things can have a benefit in lowering your student loan payment if you understand how they work. Let's get started.
Are your student loan payments or loan balances a major obstacle in your financial life? Then tune in and let's escape student loan debt hello. My name is Brenton Harrison of escape student loan debt and your host for the Escape student loan debt podcast. We are back again after two weeks off, and in this episode we are talking about some of the complexities that come into play when you have federal student loans, you're navigating income driven repayment plans and you are married to a person who either has an income. In some cases, they don't have an income, but they have their own student loans. Maybe their income is higher than yours. There's all different types of scenarios, but the fact of the matter is, when you are married with federal student loan debt, navigating income driven repayment plans can be difficult if you don't know what you're doing. So I wanted to walk you through some of the different ways that being married can impact your payment, your strategy, and how an understanding of these rules can actually put you in a position of authority in the driver's seat so that you can use those rules to your advantage. And in the past, when talking about income driven repayment plans, we have mentioned several times the importance of understanding the difference between tax strategy and what it means to file your taxes as a married couple. Married filing jointly versus what it means to file your taxes. Married filing separately in most cases, it saves them money, from a tax perspective, to file married filing jointly. The difference, however, is when you file your taxes married filing separately. Now for all income driven repayment plans, it didn't used to be that way, but now is the case for all income driven repayment plans that a married couple can have their spouse's income excluded from their payment calculation if they file their taxes. Married filing separately so before the break, we're going to talk about what happens if you're applying for an income driven repayment plan and trying to calculate your payment if you are married and filing your taxes jointly. And after the break, we're going to talk about what will happen if you have student loans and you're filing your taxes, married filing separately, and walk you through a few different scenarios and see what the impact may be. So, let's assume for this example and in this entire podcast episode, that the person or the couples that we are going to look through are going to be applying for their payment in terms of the initial spouse for the save plan, the saving on a valuable education plan. And we're going to assume that the percentage of the discretionary income that they make towards their student loans each year is 10%. If you've been listening to this podcast, you'll know that eventually there will be people out there who will pay a lower percentage. That rule has not yet come into play. So for this episode's purposes, we're going to assume that everybody is going to be applying for the save plan and they're going to be paying 10% of whatever their calculated discretionary income may be. Well, the first step, if you are filing married filing jointly and you're applying for the save plan for yourself, don't consider your spouse yet for yourself, is that they're going to look at whatever is listed on your tax return. In this scenario, your spouse's income would be on that tax return as well, and they're going to use that number to calculate the total household payment that you would be required to pay under the save plan. I say total household payment because it's not like each of you, if you were on the same plan, has to each pay 10% of your discretionary income toward your loans because that would mean that the household is paying 20% of their discretionary income towards their loans in total. That's not the case. The entire household is limited to having to pay 10% of their discretionary income, in this case towards their student loans, no matter how that 10% happens to be divvied up. So in this scenario, let's assume that we're applying for the save plan and the total household payment is calculated, and maybe it's $1,000. That means that before we even consider which spouse earns what, we know that whenever we total up their payments, it cannot exceed that $1,000 per month. The next step, when they're considering your student loan payment under the save plan is they look at the totality of your household debt and they figure out which percentage of the household debt belongs to you. If your spouse doesn't have any federal student loan debt, then the entire $1,000 in our example would go towards your student loans. But let's assume for conversation's sake that you have a household where both of you have student loans, you're applying for the save plan, and theoretically, they're going to put your entire loan balance in a pot. So maybe in our example, you have $200,000 that you owe in total as a couple. And when they look at who owes what, you owe 70% of that total, you owe $140,000 of the 200,000, and your spouse owes 60,000, which is 30% of that total. The second step would be they look at that percentage and they say the person who's applying for this is applying for the save plan. So we have $1,000 household payment. Since you own 70% of the loans that are in the pot, 70% of that total, which would be $700 a month, would go towards your loans under the Save plan. Here's step three. And it's not even much of a step. It's just an understanding for you as to how this will work for your spouse, because we haven't brought them up to this point. We've included their income. We figured out that 70% of the household payment under the save plan should go towards your loans. But you're probably thinking that that requires that the other 30% under the save plan will go towards your spouse's loans. That's not actually how it works, because your spouse does not have to sign up for the same income driven repayment plan that you do. They don't even have to sign up for an income driven repayment plan at all. In actuality, when they're calculating the amount that goes towards your loans, they're doing it based on the percentage of the total debt that you have. And they're doing it based on the rules of the income driven repayment plan that you're signing up for. But just because we took 30% of that household payment for the save plan off of the table, your spouse can be on the other side of this equation, and they can evaluate their own strategy, and they can choose to not even do an income driven repayment plan. They can do a standard plan if they so choose, or they can pick from any of the available income driven repayment plans. And if they choose something other than the save plan, they would go through the same first two steps, figuring out the household payment under that plan, figuring out the percentage of the debt that would go towards their loans under that plan, irrespective of what you're doing on your side of the fence. And trust me, it is easiest to show this on paper if you're following along on screen. You'll see an example. If you're listening, we'll put this example in the show notes. But what you're seeing here is a family of four. They have $150,000 adjusted gross income, and they file their taxes married, filing jointly. Now, we're also going to assume that when we put all of their loans into the pot, that spouse one has 70% of the loans in the pot and spouse two has 30% of the loans in the pot. So let's look at what it would do if spouse one was trying to figure out their payment under the save plan. The first thing they do is they calculate the total household payment based on that $150,000 income under the save plan, and they find that the total household payment under that plan would be $665 a month. And we know that spouse one has 70% of the loans in the pot. So we take 70% of that total household payment, which is $465, and we apply it to spouse one's loans. Now, if spouse two also decided to do the save plan, that would mean that the remaining $200 of the household payment under save would be applied to their loans. But we're going to assume in our example that spouse two doesn't choose the save plan, they choose the pay as you earn plan. Maybe they don't want to choose the save plan because they have graduate school loans, and that requires them to pay for 25 years under the Save plan, whereas under pay as you earn, they can have their loans forgiven in 20 years. So instead of a $665 total household payment as it was under save, under pay as you earn, the first step is to calculate an $860 total household payment under pay as you earn, we then look at the percentage of spouse two's loans in the pot, which is 30%, and instead of the $200 that they would have had applied to their loans if they also chose the save plan, under pay as you earn, 30% of that total household payment is $258. So if you're looking at this and you're saying, well, why would they do this? Why would they choose a different plan? This person is basically saying, it's only costing me $58 a month more to do this strategy, and I pay my loans for five years less by choosing the pay as you earn plan. So this may be something that makes sense for them to do. So while that's a complicated strategy, I hope that seeing it on paper breaks it down a little bit easier. And after the break, we're going to talk about going away from Mary filing jointly and what happens to your federal student loans if you file separately and how that impacts some of the scenarios that we'll discuss after the break. This is the escape Student Loan Debt.
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[00:10:37] Speaker A: Let's talk about some of the rules for filing your taxes. Mary filing separately when it comes to your student loans, so that before we get into the scenarios, you can understand the strategy at play. The first thing you need to understand is the benefit of filing your taxes. Mary filing separately from a student loan perspective, as we discussed, is the fact that you do not have to include your spouse's income in your calculation for discretionary income, which can significantly lower your student loan payment in some scenarios. But here are the negative rules that you have to keep in mind. Both of you cannot claim your children. So if you each have student loans and you are applying this strategy and you're filing your taxes. Mary filing separately and you have a couple kids, you can't both exclude your spouse's income and both claim your children. You either have to do all or nothing. Each of you can claim one child, but when you total up the children that you have, you can't just magically go from two to four. And then the last rule before we get into scenarios, and this is not a rule for student loans, it's just how taxes work. You need to know whether you live in a common law state or a community property state. We'll put a list of the number of community property states, but what you need to know about community property states is in other states that aren't community property states. Let's say that you have a spouse that earns $50,000 and you earn $150,000. Well, if you file your taxes in a non community property state separately, you would have a tax return that has $150,000 on it, your spouse would have a tax return that has their $50,000 of income on it. With a community property state, instead of doing it separately based on what you actually earn, they take the total household income and they split it down the middle. So in our example, instead of 150 and 50, you would each have a tax return that has $100,000 on it. And that can prove beneficial. If you make a lot of money in a community property state, your spouse does not earn as much money, and you're trying to shift some of it to their tax return before you apply for your student loan payment. So now that you know those rules, let's look through some of these scenarios. In scenario one, we're looking at a couple where you have significant student loan debt and you don't earn a ton of money. So let's say that you make $50,000 and maybe you owe $100,000 in student loan debt. That's a lot of loans, given that income. And if your spouse were not in the equation, you would probably be trying to have these debts forgiven through the income driven repayment plans or even public service loan forgiveness. Now, let's say that you marry someone who doesn't have a ton of loans, or maybe they have no loans at all, but they earn a significant income. So in our scenario, we have a family of four. Spouse one that has either low loans or no loans earns $150,000, and spouse two earns $50,000. And they're the ones that are going for forgiveness or public service loan forgiveness. Well, if we look at this, if they file their taxes, Mary, filing jointly, all four people will be in the household. And when they calculate discretionary income under the Save plan, their discretionary income will lead to a monthly payment of over $1,000 a month. And if your spouse that's high income earning is either not on an income driven repayment plan at all or they have no loans, you'd be earning $50,000 and $1,000 a month would be going towards your loans. But now let's look at what happens if they file married filings separately in a common law state. Now they're each going to get a tax return that has their income on it. Spouse one that earns a lot of money has 150,000 on their tax return, but you have 50,000 on your tax return. When it comes to calculating your discretionary income, you have to remove them. But in this scenario, I would say that you should claim the children. Why wouldn't you? Your spouse isn't on an income driven repayment plan. So the number of people in the household when calculating your payment goes from four to three. But in this calculation, you have a negative discretionary income, which leads to a $0 student loan payment which still allows you to receive credit towards forgiveness. You don't have to actually have a payment for forgiveness credits, you just have to apply for the plan. And if the plan says that you don't make enough to have a payment, you still get that credit. So in this scenario, filing taxes jointly versus separately, literally, is the difference between over $12,000 a year in student loan payments versus $0 in student loan payments. And if you're applying to have your student loans forgiven, then you want to pay as little as possible. And this could be pending how much it costs you in your taxes. A really, really valuable strategy. Next, let's take these people to a community property state. So maybe this couple lives in California, and in this scenario, we're going to assume that there's a high income earning spouse, and then we're going to have a spouse that stays at home. The high income earning spouse has federal student loans. The spouse that stays at home either has a low loan balance and is not on an income generated repayment plan, or maybe they don't have student loans at all. So in an ideal world, we would shift as much of our income from the high income earner with the loans to the tax return of the person who stays at home without the loans. If they did this in a state that wasn't a community property state, this wouldn't work because your income would be on your tax return. But in a community property state, it splits the total household income right down the middle. So if they file their taxes married filing jointly, there would be four people in the household spouse. One in our example has $150,000 adjusted gross income. It leads to a $665 payment towards their loans. But look at this. This seems like it's not logical, but this is how it works. If they file separately in one of these states, the $150,000 would be split down the middle. And now our high income earner, who actually earned 150,000 has a tax return that says 75,000. Now they're going to claim the kids because their stay at home spouse doesn't have student loans in this scenario. So there'll be three people in their payment calculation, and it takes that payment from $665 a month all the way down to $141 a month for a person who is earning six figures a year. This is all that would be going towards their loans. And this is the power of understanding the rules for not just the payment calculation, but also the state in which you live and how it impacts your tax return. Before our last scenario, let's switch it up a little bit to this point. We've been talking about couples where there's a huge imbalance when it comes to incomes. One spouse earns 150, the other doesn't earn anything at all, earns 50,000. You're probably wondering, does this only work if there's an imbalance in income? What about if our spouses in our relationship earn relatively close to each other? What if they earn the same amount? It can still be a benefit to file separately from a student loan perspective. And the reason has to do with the potential impact of the federal poverty level. We've talked about the fact that when they calculate the income that's used to determine your payment, you're allowed to remove a certain percentage of the federal poverty level before that percentage is calculated. With the save plan, that percentage went even higher. It's 225% of the federal poverty level that gets taken away before your payment is calculated. Now, when you add more people to your household, the federal poverty level increases. So, for example, just with round numbers, let's say you had three people in your house. Maybe the federal poverty level is $30,000. If you had four people in your house, maybe the federal poverty level is $36,000. And it would seem like the ability to add another person and increase that federal poverty level by filing jointly would have a big impact on your payment. And it can, but it's not necessarily as big of an impact on the payment as lowering the number of people in the federal poverty level calculation, but also lowering the income that you're using to calculate it so that it's closer to that federal poverty level. Put more simply, let's say that you have a person who is filing their taxes jointly and they earn $200,000. Well, if they have four people in their household and they find out that they get to take $60,000 away from that household income before they calculate their loan payment, well, there's still $140,000 left. Well, now, let's assume that they're filing their taxes separately and they have $100,000 that they're using in the calculation. And the federal poverty level that they get to remove is lower. Maybe it's $50,000 instead of 60,000, but when they take that away, there's only $50,000 left. As opposed to the $140,000 in scenario one. The closer the income and the calculation gets to the federal poverty level, the bigger an impact it can have on your student loan payment. Let's look at a scenario so we can show you on paper, we have a family of four. Now, instead of there being an income imbalance, each of them earns $75,000 of adjusted gross income, and each of them has student loans that they're applying to repay. Under the save plan, if they file their taxes, Mary, filing jointly, then when it comes to student loans, they would have four people in the household for their calculation. They would have $150,000 adjusted gross income, and it would lead to a $665 household payment that would be apportioned to each of their debts, depending on how much they owe of the total pot. Now, let's assume that they file separately. So now maybe each of them claims a child on their calculations. So each of them have two people in the household. So their federal poverty level is going to decrease, but their income has decreased significantly. Now they only have $75,000 apiece in each of their calculations, much closer to that federal poverty level that gets removed before calculating their payments. And as a result, instead of $665 total, if their loans were 50 50, they would each pay $242 towards their loans for a total household payment of $484. So they save almost $200 a month in student loan payments. But they would then need to go to their tax preparer to figure out how much it cost them in taxes to know whether this made sense. So I know this was a really complex episode. For that reason, it's longer than most of our episodes typically are, because I wanted you to understand the complexities of being married with student loans, but also the opportunities, if you can understand the rules. And rather than trying to shoehorn that into 15 minutes, I would rather just go a little bit longer, give you some examples that you can dig into on your own time, and I hope that those examples were helpful for you. We will be back in two weeks with more student loan tips and tricks that can help you get your loan balance forgiven, reduced, reorganized, or expedited. And I hope to see you then you from escape student loan debt this was the escape Student Loan Debt podcast, a show for established professionals whose student loan payments or loan balances are impacting their marriage, their business, their credit, or their dream of achieving homeownership.
