How Spousal Income Affects Income-Driven Student Loan Repayment Plans

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?

Marriage & Income Under IDR Plans

Income Considered When Married Filing Jointly

Income Considered When Married Filing Separately

1. Revised Pay As You Earn

2. Pay As You Earn

3. Income-Based Repayment

4. Income-Contingent Repayment

Understanding Income-Driven Repayment Plans and the Role of Spousal Income

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.

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.