How Spousal Income Affects Income-Driven Student Loan Repayment Plans

Let’s tackle a question you might have if you’re married and considering an income-driven repayment (IDR) plan: “Which income-based repayment plan requires spousal income?”

The answer? It depends on the specific IDR plan and how you file your taxes.

Here are the specifics:

• Revised Pay As You Earn (REPAYE): Your spouse’s income is factored into your monthly payments, even if you file separate tax returns. Exceptions are made if you’re separated or cannot reasonably access your spouse’s income information.

• Pay As You Earn (PAYE): For married borrowers filing jointly, the PAYE plan calculation includes both the borrower’s and spouse’s income. If you file separately, only the borrower’s income is considered.

• Income-Based Repayment (IBR): If you and your spouse have student loans and file taxes jointly, the IBR plan considers your joint federal student loan debt and your joint income. If you file taxes separately, only your income is considered, which may impact certain tax benefits. This is the only IDR plan that FFEL Loans are eligible for. Plus, you need a partial financial hardship to choose this plan.

• Income-Contingent Repayment (ICR): ICR follows the same rules as IBR. If you and your spouse both have student loans and file taxes jointly, both your joint federal student loan debt and joint income are considered. But if you file taxes separately, the ICR Plan uses only your income. This is the only plan Parent PLUS Loan borrowers are eligible for unless they use the double consolidation tactic.

Remember, IDR plans usually set your student loan payment according to your adjusted gross income (AGI). Your AGI is your total income minus certain deductions, like student loan interest or contributions to retirement accounts. You can find it on your federal income tax return.

After marriage, you can file your federal income tax return jointly or separately.

Here’s the general rule:

• Joint Tax Return: If you file jointly, your student loan payment is based on your joint annual income.

• Separate Tax Return: If you file separately, your student loan payment is based on your individual income.

The exception to this rule is the REPAYE Plan, which bases your student loan payment on your combined income and family size, regardless of your filing status.
Related: Am I Responsible For My Spouse’s Student Loans?

Income-Driven Repayment plans aim to make managing student loan debt easier by capping your monthly payments at a certain percentage of your discretionary income and loan balance. They essentially align your loan repayments with your earnings, providing flexibility for those with lower or fluctuating incomes.

To illustrate the interaction between IDR plans and spousal income, let’s consider a couple of examples:

1. Scenario 1: Joint Tax Filing with High Combined Income: Alex and Jordan, a married couple with student loans, are considering enrolling in an IDR plan. They file their taxes jointly and have a high combined income. Their joint income is considered for the IDR plan, which increases their monthly payments. But filing jointly also provides certain tax benefits, such as a potentially more advantageous tax bracket, the student loan interest deduction, the childcare tax credit, and the Earned Income Tax Credit.

2. Scenario 2: Separate Tax Filing with Lower Individual Income: Taylor, who has student loans, and Reese, who doesn’t, file their taxes separately. Taylor enrolls in an IDR plan. By filing separately, Reese’s income is excluded from the IDR plan’s payment calculations, which reduces Taylor’s monthly payments. But they forfeit certain tax benefits only available to couples filing jointly.

Related: Can Married Filing Separately Claim Student Loan Interest Deduction?

In both scenarios, it’s important to note that some couples may choose to initially file separately and then later amend their tax returns with the IRS to a joint filing status after they’ve gone through recertifying their income. This tactic allows them to lower their IDR plan payments without permanently sacrificing the benefits of joint filing.

As evident from these examples, the impact of spousal income on IDR plans depends on your individual circumstances, including your total income, tax filing status, and whether both spouses have student loan debt. As such, speak with your financial advisor or tax professional, or book a call with us for personalized advice.

Upcoming Changes to IDR Plans under the Biden Administration

The Biden administration plans to implement important updates to the Income-Driven Repayment (IDR) plans to provide a new plan with more financial flexibility for married borrowers. These updates include:

• Equal Treatment across IDR Plans: The updated regulations will harmonize the treatment of married borrowers across all IDR plans, including the Revised Pay As You Earn (REPAYE) plan.

• Option to Exclude Spousal Income: Married borrowers can exclude their spouse’s income from repayment calculations by opting for a “married filing separately” tax status, just like in other IDR plans.

• Increased Financial Flexibility: This uniformity across all IDR plans will give married borrowers more control over their loan repayments and financial planning.

Rationale Behind the Changes to IDR Plans

The U.S. Department of Education has outlined several reasons for aligning the treatment of spousal income across all IDR plans:

• Simplified Decision-making for Borrowers: Harmonized rules across all IDR plans will make it easier for borrowers to choose a plan that fits their needs.

• Operational Efficiency: Uniform requirements across different plans will simplify the process of handling application requests for the Department.

• Streamlined Process: Excluding spousal income under all IDR plans for borrowers who file separate tax returns will simplify and automate the IDR application process.

The Department intends to make IDR plans more user-friendly and operationally efficient. For a detailed understanding, please refer to the proposed rulemaking for the new IDR Plan.

Note: This revised approach will change the terms of the REPAYE plan to exclude spousal income for borrowers who are married and file their taxes separately.

Navigating IDR plans as a married couple involves understanding the intricate details and implications of the available options. Here are some key factors to consider when choosing a plan that aligns with your financial circumstances:

1. Combined Income: Higher combined incomes can lead to larger monthly payments under IDR plans, as these payments are generally a percentage of your discretionary income.

2. Level of Student Debt: Couples with a higher total student loan debt may benefit more from IDR plans, especially if they qualify for loan forgiveness after the repayment term.

3. Tax Filing Status: The choice between filing taxes jointly or separately can significantly affect your monthly payment amount under IDR plans.

4. Potential for Student Loan Forgiveness: Some couples may aim to maximize the amount of loan forgiveness by choosing the IDR plan with the lowest possible monthly payment.

 

Your spouse is required to sign the Income-Driven Repayment Plan Request Form, not because they are assuming responsibility for your student loan debt, but to certify the truthfulness of the family size and income information provided. This holds true regardless of whether you are separated or until your spouse dies.

In some IDR plans, your spouse must submit proof of their income even when you file taxes separately. While the rules explicitly prevent loan servicers from using this income to calculate your payment, the requirement still exists. But the reasons behind this still need to be clarified.

Remember, your spouse’s signature does not make them liable for your student loan debt—it merely certifies the accuracy of family size and income data. Even if your spouse refuses to sign, your student loan obligation remains yours unless they refinance or co-sign the debt with a private lender.

If your spouse declines to sign the IDR form, you might be tempted to check the box that says, “Married, but cannot reasonably access my spouse’s income information.” But it’s important to understand the implications of this choice.

Related: Marrying Someone With Student Loan Debt

The term “Married, but cannot reasonably access my spouse’s income information” appears on the IDR Plan Request form. Still, it lacks a definitive interpretation due to the absence of guidance from form instructions or applicable regulations.

Historically, this language was designed to safeguard borrowers in particular situations:

1. Those estranged from their spouses despite filing taxes separately.

2. Survivors of domestic abuse.

But it doesn’t guide borrowers whose spouses refuse to sign the form.

Including your spouse’s income is a requirement for IDR plans. That requirement could result in a higher payment amount based on the increased combined income. Remember, this does not translate into an obligation for your spouse to repay your loan.

It’s crucial to specify on your IDR plan request if you’re separated or divorced but previously filed joint tax returns to avoid the requirement of providing your estranged or ex-spouse’s income information.

If you completed the IDR plan request on the Federal Student Aid website, StudentAid.gov, your request will remain in “Pending” status until your spouse provides a signature and/or income information.

Related: Are Student Loans Community Property?

“Fraud” usually necessitates an intent to deceive or mislead. With regards to checking “Married, but cannot reasonably access my spouse’s income information,” whether it’s fraudulent or not depends on certain circumstances:

1. Spouse’s Willingness to Provide Information: If your spouse is willing to sign the form and provide their income information, checking the box could be construed as fraudulent.

2. Spouse Refuses to Provide Information: If you filed your last tax return separately and your spouse refuses to provide their income information or sign the form, checking the box likely isn’t fraudulent.

3. Joint Tax Filing and Spouse’s Refusal: If you filed your latest tax return jointly, but your spouse refuses to sign the form, the situation becomes ambiguous.

When you check this box, you’ll be treated as single, your gross income will be used to calculate your discretionary income, and your spouse will not be included in your family size. This could lead to a higher loan payment amount. Whether or not this is fraudulent remains unclear and potentially risky.

Given the uncertainties and potential legal implications, it’s advisable to consult a financial advisor or legal professional before making any decisions. Regulatory guidance and specific circumstances can significantly impact the interpretation of “reasonable access.”

If you’re a married couple struggling to afford federal student loan payments on an Income-Driven Repayment plan, consider these options:

1. Apply for Federal Forbearance or Deferment:

• These options allow you to pause your loan payments temporarily.

• Be aware that interest might continue to accrue during this period.

• This approach provides short-term relief but doesn’t reduce the overall loan amount.

2. Consider Refinancing Your Student Loans:

• If you have strong credit, you may qualify for a lower interest rate, saving money in the long run and accelerating your repayment timeline.

• Extending your repayment period through refinancing can reduce your monthly payment, but you’ll pay more interest over time.

• Note: Refinancing federal loans means losing benefits and protections the federal government offers its student loan borrowers, including access to income-based payment plans and relief measures such as suspending federal payments and interest accrual under the CARES Act.

• Use an online marketplace like Credible to compare offers from various student loan refinance companies and to find the right fit.

3. Leverage COVID-19 Relief Measures:

The pandemic has led to temporary relief measures, including a pause on federal student loan payments and interest accrual through August 29, 2023.

If you’ve had to pay on your federal loans over the past three years, consider combining your loans into a Direct Consolidation Loan to get these benefits, which include a chance to have your remaining balance wiped out under the Public Service Loan Forgiveness Program or the income-driven repayment waiver.

Both PSLF and the IDR Waiver forgive your balance after you’ve made sufficient qualifying payments under IDR Plans.

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