“Joint” or “Separate” Student Loans?
Law students finance legal education with primarily federal student loans including unsubsidized and GradPLUS loans. These loans are issued to individual borrowers. There is no option to borrow a joint federal loan together with a spouse. Married borrowers may not consolidate their federal student loans into a joint federal consolidation loan (years ago such a loan was available, but it was problematic for borrowers and is no longer available). Student loan borrowers should not refinance federal student loans into a private joint consolidation loan without seriously considering the risks including losing valuable borrower rights and flexibility unique to federal loans.
Student Loan Repayment Plans
Federal loans offer a lot of different repayment plans. To decide which one is right for your family, consider the family’s current financial situation and your short- and long-term financial goals. Consider your current cash flow and your expectations over time. Think about saving or maintaining an emergency fund, whether you have insurance coverage to protect your family, and whether you have other debts that may be more expensive than student loans like credit card debt.
Evaluate the various federal student loan repayment options including the Standard Repayment and Income-Driven Repayment plans:
Standard 10-Year Repayment results in fixed equal monthly payments over 10 years. You’ll pay off your loans quickly so you pay less interest, but monthly payments are likely to be high. There is also no penalty for early repayment so if you are in a position to do so, you may save interest charges over time by paying more than is required. Standard repayment can be a good choice for those whose income and financial circumstances allow them to repay their student loans aggressively.
Income-Driven Repayment Options provide for reduced monthly payments based on a percentage of income. The income-driven repayment plans (including Income-Based Repayment and Pay As You Earn) limit a borrower’s student loan payments to an affordable level given her income.
Advantages to a Married Filing Separately Tax Status
Under the income-driven plans, monthly payments are determined based on adjusted gross income (AGI) as reported on your federal tax return and the federal poverty rate that corresponds to your family size. AGI is made up of your total combined income from job earnings, self-employment, alimony income, and interest from bank accounts—minus specific reductions or adjustments. Adjustments are subject to change each year, but include a portion of self-employment taxes you pay, alimony payments you pay, the student loan interest deduction, and contributions to certain retirement accounts. AGI is calculated before you take exemptions and the standard or itemized deduction (after you take exemptions and deductions you arrive at your “taxable income”).
Loan Repayment Strategy for Two
Married couples may choose to file federal tax returns with either a “Married Filing Jointly” or “Married Filing Separately” tax filing status. Married same-sex couples were previously required to file their federal tax returns as if they were not married under the so-called Defense of Marriage Act (DOMA), but have a newly recognized right to choose to file their federal tax return with the “married filing jointly” status. If a married couple chooses the “Married Filing Jointly” tax status, the joint AGI reported on the joint tax return will be considered in calculating monthly student loan payments. The higher your AGI, the more your monthly student loan payment will be under an income-driven repayment plan, so some people will pay significantly higher student loan payments if they choose to file jointly.
If a married person wants to have his or her monthly student loan payment calculated solely on the basis of her individual income and student loan debt, she must file a separate federal income tax return.
Disadvantages to a Married Filing Separately Tax Filing Status
Married student loan borrowers must try to weigh the value of tax benefits against student loan benefits. Most (but not all) married couples will pay more combined tax on separate returns than they would on a joint return. Married couples who file jointly have access to certain credits and deductions, like the Earned Income Tax Credit, and the student loans interest deduction, which they would not get if they filed “married filing separately.”
Evaluating the Student Loan Interest Deduction: A student loan borrower is eligible to deduct as much as $2,500 each year for interest paid on a student loan. You can deduct student loan interest on loans you took out to pay “qualified higher education expenses” (like tuition, fees, room and board, books, and supplies) for yourself, for your spouse (if you file jointly), and for your dependents.
The student loan interest deduction is an “above the line” adjustment to income on the tax Form 1040 or 1040A, which means you can take the student loan interest deduction even if you don’t itemize, or in addition to your itemized deductions, but you can’t take it if you file the Form 1040EZ. Your lender should send you a Form 1098-E, showing the interest you paid.
In addition to the $2,500 cap, the amount of your student loan interest deduction is further limited according to income. Currently, if your total income is under $60,000 (or $120,000 for married people filing jointly), then you can deduct the full $2,500 in student loan interest. If your income is more than $75,000 (or $150,000 for married filing jointly), then student loan interest cannot be deducted at all. If your income is more than $60,000 but less than $75,000 ($120,000 to $150,000 for married filing jointly), then your deduction is prorated. Figure your deduction using the IRS Student Loan Interest Deduction Worksheet. But married tax payers must file a joint federal tax return or forgo the student loan interest deduction.
Other disadvantages to a “married filing separately” tax status include:
- Your tax rate generally will be higher than it would be on a joint return.
- You cannot take the credit for child and dependent care expenses in most cases, and the amount that you can exclude from income under an employer’s dependent care assistance program is limited.
- You cannot take the earned income credit.
- You cannot take the exclusion or credit for adoption expenses in most cases.
- Deductions for contributions to a traditional IRA are reduced or eliminated if your income is more than a certain amount, and this amount is much lower for married individuals who file separately.
- You cannot take the education credits, including the deduction for student loan interest.
Living in a Community Property State Makes it Even Trickier
In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), married persons are considered to own their income jointly.
When a married couple from a community property state files separate federal tax returns, they generally must report half of their combined income rather than reporting their own earnings alone. In order to have their payment based on separate rather than joint income, student loan borrowers in community property states must file a separate tax return and must also supply “alternative documentation” of their separate income to their loan servicer.
Marriage Affects Your Family Size, Even If You Don’t Have Kids
Although AGI is driven by your federal tax return, family size is not. According to federal regulations, family size is determined by counting the student loan borrower, his or her spouse, and children if the children receive more than half their support from the borrower. Family size also includes other individuals if they (1) live with you and (2) receive more than half their support from you and will continue to receive this support for the year the borrower certifies family size.
This means that you can count your spouse in your family size even if you choose to file separate tax returns. Before the DOMA case recognized same-sex marriages, same-sex spouses were only counted toward family size as “other individuals” who both lived with the borrower and received more than half their support from the borrower. Now, same-sex married couples may count their spouses as part of their family size even if the spouse does not receive more than half their financial support from the student loan borrower.
Weighing the Options When Opting for Income-Driven Repayment
Married student loan borrowers can choose to either:
- file taxes jointly and have monthly payment based on joint AGI and combined student debt, or
- file taxes separately and have monthly payment based on individual AGI and individual student debt.
If a married couple files a joint federal tax return, a total student loan payment amount for the couple will be calculated taking into account both spouses’ debt and both spouses’ income. A proportion of the total payment will be assigned to each spouse based on their share of the couple’s total student loan debt.
For example, say that Juan-Carlos earns $45,000 as a public defender while his wife Hunter earns $60,000 as an associate in a mid-sized law firm. Juan-Carlos and Hunter have no children. Let’s assume Juan-Carlos owes $25,000 on his eligible federal student loans and his wife Hunter owes $75,000 on her loans (Hunter owes 75 percent of the total marital student loan debt).
Hunter and Juan-Carlos want to figure out whether they ought to file a joint or separate federal tax return. They decide to compare the tax consequences and the student loan consequences of each alternative. They determine that filing separately costs $622 more annually in tax payment than filing jointly. (Table I).
Also, they find that filing jointly requires $260 more monthly in student loan payments for a total of $3,120 more annually in student loan payments. They decide to file separately this year because they need to build a small cash reserve in case of emergencies and they plan to reevaluate the pros and cons each year. (Table II).
Amending an Already Filed Return
You can change your filing status from a separate return to a joint return by filing an amended return. You have three years from the due date to amend your filing status from separate to joint using IRS Form 1040X. However once you file a joint return, you cannot amend your filing status to file separate returns after the due date (unless one spouse has died). n
Can Divorced Couples Be Held Responsible for One Another’s Student Loan Debt?
Some couples may choose to address how debts would be paid in the event of divorce in a pre- or post-nuptial agreement. In the event of divorce, whether you are liable for your spouse’s debts depends on any agreements you may have and your state’s laws.
A divorced person may be held jointly responsible for a former spouse’s student loan debt if the debt is determined to be “marital” debt rather than “separate” debt under a particular state’s law. Debt incurred before marriage or after separation is typically considered “separate debt”, however student loans borrowed during marriage may be deemed “marital” debt, especially in the community property states.
Courts also consider factors including whether the student loans were used for expenses that benefited both spouses (for example, living expenses), whether the degree financed with student loans is marital property according to the state’s laws, and whether both spouses benefit from the earning capacity conferred by the degree.
The rules regarding division of debt upon divorce also apply to same-sex marriages (in states that permit same-sex marriage) and to domestic partnerships and civil unions in states that recognize such relationships as the equivalent of marriage.
It makes sense for couples to talk about money early and often. Talk about how to establish a spending plan you both can live with, figure out how to afford the things you really want, and by all means, show each other your student loan debt.