Marriage brings significant changes -- especially to your finances. Your tax filing status changes, your retirement plan needs to be updated, and you may have to rethink how you pay back your student loans.
In some ways, these changes can be good for your wallet. In other ways, not so much. Whether they’re good or not, you need to be aware of them so you can plan appropriately. Here's a closer look at three ways marriage can impact your student loans.
1. It could change the payments on your income-driven repayment plan
Income-driven repayment plans base your monthly payments on your discretionary income. These plans include
- income-based repayment (IBR),
- income-contingent repayment (ICR),
- Pay as You Earn (PAYE), and
- Revised Pay as You Earn (REPAYE).
Your discretionary income is the difference between your income and 150% of the poverty guideline for your state and family size. ICR is an exception, which uses the difference between your income and 100% of the poverty guideline.
When you get married, the government considers your spouse's income alongside yours if you file a joint tax return. The REPAYE plan considers your spouse's income whether you file a joint or separate tax return.
The extra money your spouse brings into the household could raise your monthly student loan payments because your discretionary income will be higher. The difference could be negligible or it could be significant, depending on your spouse's income.
If he or she also has student loan debt, the increased household income will affect both parties' income-driven student loan payments, though the lower-earning spouse will see their payments rise more than the higher-earning spouse because of the greater increase in their discretionary income.
If you're concerned about what marriage might do to your student loan payments, you can file separate tax returns. But this means you're giving up potential income tax savings and possibly some educational tax deductions as well. More on those later.
Weigh the pros and cons to see which route saves you the most money overall. Consult a tax professional or financial advisor if you're unsure.
2. You may be able to qualify for better interest rates when you refinance private student loans
The government charges all student borrowers the same interest rate regardless of credit. So you're stuck with the interest rates you have on your federal student loans unless you consolidate them.
This isn't the case with private student loans. Lenders assess your credit history, income, and debt-to-income ratio to decide what to charge you. If you think you may qualify for a better rate down the road, you can refinance your student loan with a different private lender.
If one spouse has poor credit, a low income, or a high debt-to-income ratio, he or she may find it difficult to secure a good interest rate on a private student loan. But the other spouse may be able to help by cosigning the loan. They're essentially vouching for their spouse's ability to repay and they promise to step in and continue making the payments if the primary borrower is unable to.
When you cosign a loan, the lender will evaluate your credit history, income, and debt-to-income ratio as well as your spouse's. The lender may give your spouse a better rate than he or she would get alone. This reduces the rate at which the student loan balance grows, making it easier to pay off.
But think carefully before you agree to cosign a loan for anyone -- even your spouse. If you get a divorce down the road, you'll still be responsible for your spouse's student loan payments if he or she can't keep up with them. And if your spouse stops paying and doesn't tell you, it could hurt your credit score.
Unless you're confident that they can and will continue to make the payments on time, don't cosign the loan.
3. It can affect your eligibility for the student loan interest tax deduction
High-earning couples who tie the knot may have to say goodbye to the student loan interest tax deduction. This enables you to write off up to $2,500 in student loan interest each year.
To be eligible for this deduction, you must be legally obligated to pay interest on a qualifying student loan and have paid student loan interest throughout the year. You cannot be listed as a dependent on anyone else's tax return and you cannot file taxes as married filing separately.
The government also looks at your modified adjusted gross income (MAGI) to determine eligibility. This is your adjusted gross income (AGI) with certain tax deductions added back in. For married couples, if your MAGI exceeds $135,000, your student loan interest deduction is reduced according to the following formula:
- Subtract your income from $135,000 and divide the result by $30,000.
- Multiply the result by the total amount of student loan interest you paid throughout the year or $2,500, whichever is less.
- Subtract the result from Step 2 from the total student loan interest you paid or $2,500, whichever is less. This is the maximum student loan interest tax deduction you may claim for the year.
Let’s say you paid $1,000 in student loan interest throughout the year and your MAGI is $150,000. Here’s what you’d do:
- Subtract $135,000 from $150,000 to get $15,000.
- Divide $15,000 by $30,000 to get 0.5.
- Multiply 0.5 by the $1,000 you paid in interest, leaving you with $500.
- Subtract $500 from the $1,000 you paid in interest, leaving you with a maximum $500 student loan interest tax deduction.
Married couples filing jointly who earn more than $165,000 are not eligible to claim the student loan interest tax deduction for 2019. The government may adjust the MAGI eligibility requirements from year to year, so always check before filing your taxes to see if it has changed.
Marriage is exciting, but it can also require big financial adjustments. By understanding the ways that marriage can impact your student loan payments, you can more easily determine the best way to repay the debt and save yourself money.