Does My Spouse’s Income Count for Student Loan Repayment?

Navigating student loan repayment can become more intricate when marriage enters the picture, particularly concerning how a spouse’s income might influence payment calculations. The answer depends on several factors, including the specific type of repayment plan chosen and the couple’s tax filing status. Understanding these interconnected elements is important for effectively managing federal student loan debt in a marital financial landscape.

How Filing Status Affects Income Calculation

The foundation for calculating federal student loan payments under income-driven repayment (IDR) plans is the borrower’s Adjusted Gross Income (AGI). This figure, found on line 11 of IRS Form 1040, represents a taxpayer’s gross income minus specific deductions. It serves as the primary income measure for determining affordability within these repayment programs.

A married borrower’s tax filing status significantly dictates how their AGI is considered for student loan purposes. When a couple opts for a “Married Filing Jointly” status, their incomes are combined, and the resulting joint AGI is typically used in the student loan payment calculation. This means the total household income is factored into the monthly payment assessment.

Conversely, choosing “Married Filing Separately” generally means that only the individual borrower’s AGI is considered for their student loan repayment. This can allow a borrower to exclude their spouse’s income from the calculation, potentially leading to a lower monthly student loan payment. The decision of how to file taxes directly impacts the income figure reported to student loan servicers.

The way AGI is calculated for IDR purposes is crucial because it forms the basis of discretionary income. Discretionary income is the difference between a borrower’s AGI and a percentage of the federal poverty guideline for their family size. This discretionary income is then used to determine the actual monthly payment amount.

Income-Driven Repayment Plans and Spousal Income Rules

Federal student loan borrowers have access to several Income-Driven Repayment (IDR) plans, each with distinct rules regarding how spousal income is considered. These plans, including Pay As You Earn (PAYE), Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), and the Saving on a Valuable Education (SAVE) Plan, aim to make monthly payments affordable based on income and family size. The treatment of a spouse’s income often hinges on the chosen tax filing status.

For PAYE, IBR, and ICR plans, if a married borrower files taxes jointly, both the borrower’s and spouse’s income are included in the payment calculation. If the borrower files “Married Filing Separately,” only the individual borrower’s income is considered for determining their monthly payment.

The SAVE Plan, which replaced the Revised Pay As You Earn (REPAYE) plan, represents a significant update in how spousal income is treated. Historically, REPAYE always included a spouse’s income in payment calculations, regardless of whether the couple filed jointly or separately, unless they were legally separated. Under the new SAVE Plan, however, if borrowers file their taxes as “Married Filing Separately,” their spouse’s income is excluded from the payment calculation. This change provides greater flexibility for married borrowers.

Deciding on a Tax Filing Status

Choosing between “Married Filing Jointly” (MFJ) and “Married Filing Separately” (MFS) for tax purposes has substantial implications beyond just tax liability, directly affecting student loan payments. For borrowers enrolled in or considering an income-driven repayment (IDR) plan, this decision requires careful evaluation of both tax and student loan impacts. The objective is to identify the filing status that results in the most favorable overall financial outcome.

Filing as “Married Filing Separately” can lead to lower student loan payments for borrowers on certain IDR plans, as it often allows for the exclusion of a spouse’s income from the payment calculation. This can be particularly beneficial if one spouse has a high income and the other has significant student loan debt. However, selecting MFS often comes with a higher overall tax liability for the couple. This is because MFS filers may lose access to various tax benefits, including certain tax credits like the Earned Income Tax Credit, the Child and Dependent Care Credit, and education credits. Additionally, the standard deduction for MFS filers is half that of MFJ filers, and some deductions, such as the student loan interest deduction, may be unavailable.

Conversely, filing “Married Filing Jointly” generally offers more tax advantages, often resulting in a lower combined tax bill due to access to a higher standard deduction and various tax credits. However, this choice means that both spouses’ incomes are combined for IDR calculations, which could lead to higher monthly student loan payments if the joint income significantly increases the borrower’s discretionary income. The decision requires a detailed comparison of the potential savings on student loan payments against any increase in tax obligations. Many financial professionals recommend calculating the outcome under both filing statuses to determine which provides the greatest net financial benefit for the household.