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- Under a Biden administration plan, married couples filing taxes separately could get student-loan payments eliminated altogether.
- When filing separately, you can use your lower AGI to get lower monthly payments.
- Talk to an accountant to compare how much you’ll lose when filing separately to how much you’ll save in student loan payments per year.
You may see lower student-loan payments — with some having to pay nothing at all — when the federal student-loan payment pause ends, tentatively in June 2023.
Under new proposed regulations for an income-driven repayment (IDR) plan, discretionary income would be calculated at 225% of the federal poverty guidelines instead of 150%, and monthly payments will be capped at 5% of discretionary income instead of 10%.
Payments under the plan — known as Revised Pay as You Earn, or REPAYE — are calculated using the following factors:
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Travis Hornsby, a chartered financial analyst (CFA) and founder Student Loan Planner says typical undergraduate borrowers could see their payments reduced by two-thirds under the proposed changes.
Married couples could lower their monthly payments even more by filing their taxes separately, Hornsby says. Here’s how it works:
How to calculate your new monthly payment
If you file a joint tax return, student loan servicers will look at your family size, calculate a marital IDR payment, then split it proportionately based on each spouse’s debt amount, Hornsby says.
For example, take a married couple making $114,000 in combined annual gross income, with one dependent and a total of $68,000 in student loans.
Under current IDR regulations, the couple will owe $639.25 per month on their student loans.
Use this equation to calculate your new monthly student-loan payments
Here’s an equation you can use to estimate your new monthly student-loan payments, factoring in the new proposed IDR regulations.
Your annual gross income – (federal poverty guideline x 2.25) = Your discretionary income
(Your discretionary income x 0.05) ÷ 12 = Your new monthly payment
Using the example of the couple above, their new monthly payment would be $241.94.
$114,000 – ($24,860 x 2.25) = Their discretionary income is $58,065.
($56,085 x .05) ÷ 12 = Their new monthly payment is $241.94.
Under the new IDR proposal, the couple’s payments would be about 62% lower than before.
If you want to lower your student-loan payments even more, Hornsby says filing taxes separately might be beneficial.
For the example above, Hornsby says: “If you filed separately, you’re both going to deduct a family size of two. You get to have the deduction on your payment and your spouse’s payment.”
Lowering your AGI is the key to getting lower student-loan monthly payments
Following the example of the couple above, Spouse B, who makes $44,000 and claims one dependent, will have a monthly payment of $0.
Here’s a table that shows which income levels qualify for $0 monthly payments:
* For the 48 contiguous states and the District of Columbia
Using the equation above, you only need to calculate IDR payments for Spouse A, who earns $70,000 annually, with a family size of two to account for their dependent.
$70,000 – ($19,270 x 2.25) = $25,630
($25,630 x 0.05) ÷ 12 = Their new monthly payment is $106.79.
Compared to a monthly payment of $241.94 under the new proposed IDR regulations, the couple in the example above could save an additional $135.19 per month — $1,621.80 annually — by filing their taxes separately.
Compare potential tax losses with the savings from lower student-loan payments
The lower student-loan monthly payment may be enticing, but filing separately may not be the best move for every couple.
Hornsby adds: “For most people, it’s gonna cost $500 to $1,000 to file separately. The one caveat to this strategy is the difference between the couple’s incomes. If one spouse makes $100,000 and the other makes $0, filing separately might result in a larger tax penalty than the savings on their payments.”
Marianela Collado, senior wealth advisor and CEO of Tobias Financial, advises couples to look out for the following tax penalties when filing separately:
- Allowable capital gains losses will be cut in half, from $3,000 to $1,500 per person. If you have an investment portfolio that suffered losses during a volatile market, you will only be able to write off $1,500 of those losses.
- Roth IRA threshold drops to $10,000 annually. Married couples with an AGI of $218,000 or less can contribute up to $6,500 to their Roth IRA, according to the IRA’s 2023 contribution limits. However, if you earn over $10,000 as a married person filing separately, your Roth IRA contributions will be taxed at 6%. Says Collado, “When married couples file separately, the threshold drops to $10,000, which basically means they won’t be able to make a Roth IRA contribution.
- You won’t be able to claim a tax deduction on student-loan interest paid throughout the year. All student loans, including private and refinanced student loans, are eligible for a tax deduction of up to $2,500 for student-loan interest paid throughout the year. Collado says, “That’s an above-the-line deduction,” a deduction that could chip away at your taxable income overall. When filing separately, married people are no longer eligible to claim the $2,500 student-loan interest tax deduction.
- You won’t be able to claim as much rental-related losses. Married couples with rental properties, who earn an AGI of $150,000 or less and file taxes jointly, can deduct up to $25,000 in rental-related losses. If you’re now filing separately, says Collado, the income threshold is sliced in half at $75,000, and you can only deduct up to $12,500 in rental-related losses. “In this case, tax savings may be lost if a married couple files separately,” she adds.
Collado recommends working with an accountant or financial planner to compare your tax losses to your cash flow savings with lower student-loan payments. If you’re making monthly minimum payments toward the Public Service Loan Forgiveness Program, for instance, it might be beneficial to pay the absolute minimum until you reach your required 120 payments for forgiveness.
She adds, “I would step back even more and look at the big picture. You’re freeing up cash flow, but you’re still accruing interest and the liability isn’t going away.”
