Married Filing Student Loans

Chris Kadowaki, CHFC, CFP®, EA, Financial Planner

As you review your W2 and other tax documents this tax season, your filing status may seem like one of the easiest questions you’ll have to answer. But there might be more to consider when choosing whether to file single, married filing jointly, married filing separately or head of household.

But isn’t the box you check when filing determined by your marital status? What else is there to think about? 

For married couples with federal student loans, the tax-filing status selection and repayment option may impact student loan payments.

Federal student loans usually are on the standard 10-year payment plan, though there are alternative plans. Repayment plans calculate your loan payment amount based on your income and family size, and one of the places they source your income is your tax return. That means if you file your tax return jointly, your student loan payments will be calculated based on you and your spouse’s combined income.

It’s one reason why married filing separately status might make sense, to ensure the repayment determination is based only on the loan holder’s income. However, this strategy works a little differently in community property states such as Arizona, California and Texas, where your payment is based on half of your household’s income rather than one person’s income.

Consider the following scenario: A married couple located in a community property state has a household income of $150,000. The husband earns a salary of $50,000 and the wife earns $100,000. Based on community property rules, their household income will be divided in half even when they file taxes separately. In this example, their household income is $75,000 each for purposes of calculating their student loan payments. This could be a benefit to the wife, but an added cost to the husband depending on their student loan situation.

In a state that is not considered community property, the couple can file their tax returns separately and exclude their spouse’s income. The husband’s student loan payment would be based only on his salary of $50,000 and the wife’s student loan payment would be based on her salary of $100,000.

Enrolling in an income-driven repayment plan might be a financial planning opportunity if you have a high earning potential but needed student loans to finance your education. These plans can lead to forgiveness of student loan balances after 10, 20 or 25 years, but you’ll want to ensure your income-driven repayment plan will be based solely on your income (as mentioned above, some plans include your spouse’s income regardless of tax filing status). 

Financial decisions should never be made in a vacuum – and student loan repayment options are no exception. Filing separate tax returns is only one aspect of your overall financial plan. By filing separately, you may limit or eliminate the opportunity for certain tax credits or deductions. Your tax professional and tax-intelligent Financial Professional can help you compare the pros and cons of filing separately versus the benefits of lower student loan payments.

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