Student Loans: The Married Filing Separately vs Jointly Loophole

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  • Student Loans: The Married Filing Separately vs Jointly Loophole

Student loan borrowers who are married and using and an income driven repayment plan (IBR, PAYE, REPAYE) have a massive decision to make.  Do you file taxes married filing separately or jointly?

I have good news for you.  I’m going to show you a loophole that makes it so you don’t have to decide. In short, you can get the benefits of filing separately and jointly!

In this article I will detail how filing separately vs jointly affects your student loan payment and taxes as well as how you can take advantage of the loopholes to maximize your savings.

Its important to note filing separately vs jointly affects borrowers using IBR, PAYE, and SAVE.  These repayment plans are different than REPAYE.  However, if President Biden’s new REPAYE plan goes into affect, then the following discussion will apply to REPAYE as well.

The Effect Of Filing Separately vs Jointly

How you file your taxes will affect both your student loan payment and how much you pay in taxes.

Student Loan Effect

When you are married and you file your taxes jointly, your student loan payment is based on your combined income and combined Federal student loan debt.

If you file your taxes married filing separately, then your student loan payment is based only on your income and your Federal student loan debt.

Tax Effect

Most of the time when you file taxes married filing jointly, you will pay less in taxes.

Filing separately will increase your overall tax burden most of the time.

Retirement Effect

When you are married and file taxes separately, you no longer qualify to contribute to a Roth IRA.  However, you can still do so by doing a backdoor Roth IRA.

Key Take Away & The Dilemma Most Face

This is where people face a dilemma.

If they file taxes jointly, they will save on taxes but have a higher student loan payment.

If they file taxes separately, they will have a lower student loan payment but pay more in taxes.

So what do you do?

I’m going to walk you through the mistake that most make.  Then I’m going to explain the loophole to you.

The Mistake Most People Make

This is the process most people will do when deciding how to file their taxes.

Step 1:  People ask their accountant how much more they would owe in taxes if they filed separately vs jointly. This can also be done using accounting software.

Step 2:  Then they use an IDR calculator to calculate the impact between filing separately and jointly on their estimated student loan payments.

Step 3: Lastly, they compare results from Step 1 and 2 and go with the option that they believe puts more money their pocket.

For example:

Step 1: Let’s say you save $4,000 in taxes by filing jointly.

Step 2: However, filing jointly increases your student loan payments by $3,000 per year relative to filing separately.

Step 3: Filing jointly would save $1,000 annually.  Therefore, most people end up filing jointly.  However, this is a mistake because you can do both.

The Loopholes

Determining Your Monthly Payment When Filing Separately

I want to emphasize one point before moving forward…this only applies to Federal student loans. This does not apply to private student loans OR Federal loans that you refinanced.

If you are on PAYE or IBR and file separately, then your monthly payment is based on your own income and your Federal student loan debt.  That is simple.

Determining Your Monthly Payment When Filing Jointly

Confusion lies on what happens when you file jointly.  The monthly payments are calculated differently depending on the plan you’re on, i.e. PAYE, REPAYE, or IBR. I break down each calculation below.

PAYE & IBR: Your payment is based on you and your spouses’ TOTAL income and Federal student loans. However, your monthly payment IS NOT COMBINED. Let’s use an example to illustrate this.

The situation:

Your Federal Student Loans: $140,000

Your Spouse’s Federal Student Loans: $160,000

Combined Federal Student Loans: $300,000

Your Combined AGI (Combined Income): $150,000

The total monthly payment will add up to $1,098 per month. Most people think that each spouse will have to pay $1,098 per month. THAT IS NOT THE CASE!  You and your spouse will each pay a portion of that payment, divided as follows:

Your federal student loans are approximately 47% of the total (140k/300k). Therefore, you would have a monthly payment of $512.40 (47% of $1,098) and your spouse’s monthly payment would be $585.60. (53% of $1,098)

If you hear stories that someone had their payments double, triple, etc. when they started filing jointly, this is not accurate. One of three things actually triggered that change:

  • Their student loan servicer made a mistake;
  • They had something else happen that increased their payment such as salary increase; and/or
  • They are utterly confused and are not familiar with the intricacies of loan forgiveness. In that scenario, we encourage you to share our student loan forgiveness guide with them.

Also, we constantly see loan servicers and borrowers make these mistakes annually.  Our student loan forgiveness technology makes sure you are not over charged.

REPAYE: The above example applies to REPAYE as well. However, with REPAYE you don’t get to choose whether you’re going to file taxes jointly or not.  The government automatically calculates your payment based on combined incomes and your combined Federal loans regardless of how you file.

If you want more details on the difference between REPAYE and PAYE, then check out this article.

Joseph Reinke, CFA

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About the Author

Joseph Reinke is a Chartered Financial Analyst (CFA) Charter Holder and founder of FitBUX which has helped over 14,000 young professionals on their journey to financial freedom. Joseph has been personally investing since he was 12 years old.

In addition, he has experience in student loans, mortgages, wealth management, investment banking, valuation, stock trading, and option trading. He has been on 100s of podcast and has been invited to 100s of universities to discuss financial planning with their soon to be graduates.

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