Following the expiration of the COVID-19 forbearance after more than three years, millions of federal student loan debtors have started making their monthly payments again. After the student loan pause, borrowers are faced with a wide range of payback plan options, some of which are new initiatives. By altering their marital tax filing status, borrowers who are married and participating in an income-driven repayment plan for their student loans may be able to lower their payments. Compared to the previous plan that SAVE is replacing, President Biden’s new IDR alternative, the SAVE plan, offers significantly greater flexibility for this tax strategy. However, not everyone will benefit from this strategy.
Student Loan Repayment; source- Yahoo Finance
Repayment Formula Based On Family Size
With IDR plans, borrowers can use a repayment formula based on their family size and income to pay back their student loans. The payments are made in 12-month intervals and are recalculated every year in light of fluctuations in the borrower’s income. Borrowers may be qualified for student loan forgiveness after paying back their debts for a predetermined period. If a married couple files taxes jointly, the borrower and spouse’s combined income will often determine the IDR payments. Due to the tax benefits associated with filing jointly, most married couples do so. Although a spouse’s salary may be taken into account when making an IDR payment, they are not legally liable for any federal student loans that are not in their name.
REPAYE Plan
Married borrowers had the choice to file taxes individually to exclude spouse income under three of the four accessible IDR plans until last fall: Pay As You Earn, Income-Based Repayment, and Income Contingent Repayment plan. However, this was not permitted under the REPAYE (Revised Pay As You Earn) arrangement. Regardless of whether the applicant and their spouse filed taxes jointly or not, repayments under REPAYE were almost always determined by the total income of the two parties. This rendered the REPAYE plan unaffordable for certain married debtors.
The REPAYE plan was superseded by the SAVE plan, which President Biden unveiled last fall. The SAVE plan handles married borrowers the same as the other IDR plans, allowing them to deduct their spouse’s earnings from the payment computation by filing taxes individually. It also offers larger interest subsidies and fewer payments per month than other IDR plans. Those who have previously signed up for REPAYE have been switched to SAVE automatically. It could be wise to reassess if you’re married and have been filing jointly because filing separately would not have been advantageous under REPAYE.
IDR Plan For Married Individuals
Sadly, it’s not always obvious if married borrowers filing separate taxes under an IDR plan should also be paying back their student loans. There are additional factors to take into account, even if in many circumstances this will result in lower monthly student loan payments. In the first place, filing separately for taxes may cost married couples extra. Filing jointly is usually more profitable since it allows families to maximize their deductions, even without taking student loans into account. Certain deductions may be lost while filing taxes individually, which could lower expected tax returns or raise household tax obligations. It may not make economic sense if the savings from lower student payments on loans under an IDR plan are outweighed by that higher tax burden.
Furthermore, if both couples owe a sizable amount on federal student loans, things could get difficult. IDR plans take into account both the combined income of the couples who file jointly and have federal student loans, as well as the total amount of their federal student loan debt. The joint income would be used to calculate IDR payments, which would then be divided equally between the two spouses according to their respective balances. Consequently, married borrowers may not always notice a significant difference in their regular student loan payments when filing jointly versus separately (in which scenario, filing jointly may make sense if it is a more beneficial tax plan).
