I have a question about a joint consolidation loan and income-based
repayment (IBR). My wife and I consolidated our loans jointly about 10
years ago (when such things were allowed). My name is at the top of
the loan. My wife and I both individually had about $70,000 in loans and
our joint loan was $140,000. It is currently at about $150,000 owed. I make
an adjusted gross income of $60,000, and my wife (due to health
issues) cannot work and has no income. We have one child. When I run
the IBR calculator it looks like our loan payment should be about
$400/month if we file jointly. If we choose to file separately, each
tax return will show an AGI of $30,000. (We live in Washington, a
community property state.) Assuming the tax liability was similar
either way (I believe the only deduction we would lose is the student
loan interest deduction), would we have a separate IBR amount for each
of us based on the $30,000 (approximately $20/month each)?
The answer to this question applies to all married couples with
student loans, without regard to whether their loans were jointly
consolidated or kept separate.
When there is a mismatch between income and debt, where total student
loan debt exceeds total annual income, the borrowers should consider
using income-based repayment (IBR). With $150,000 in student loan debt
and $60,000 a year in income, there's a debt-to-income ratio of 2.5 to
1. Clearly, borrowers with such a high debt-to-income ratio need IBR.
The only question is whether the couple should file joint or separate
federal income tax returns.
When a married couple files joint returns, eligibility for IBR is
based on the joint income and the couple's total student loan
debt. The monthly payment under IBR is then based on the joint income
and applied in proportion to the loan balance to all the loans.
When a married couple files separate returns, eligibility for IBR is
based on each taxpayer's separate income and just the taxpayer's
own loans. (With a joint consolidation loan, each spouse is responsible
for the full loan amount and so the full loan counts toward each
spouse's separate eligibility for IBR.) The monthly payment under IBR
for each borrower is then based on just the borrower's income and
applied to only the borrower's loans.
The monthly payment under IBR is based on a percentage of the
borrower's discretionary income. Discretionary income is the amount by
which adjusted gross income exceeds 150% of the poverty line for the
family size. The same family size is used regardless of whether the
borrower files joint or separate income tax returns.
In effect, married borrowers who file separate returns get to count
the poverty-line offset twice. This treatment is intentional, designed
to compensate for a marriage penalty inherent in the IBR formula.
From a practical perspective, this means that the total monthly
payments under IBR will be lower when the couple files separate returns
if both spouses have non-zero income. More of the income will be
masked by the poverty-line threshold. If the separate income is
closer to the poverty-line threshold, it can yield significantly lower
monthly payments. In most cases the loan payments will be reduced by
hundreds of dollars per month.
For example, $60,000 in joint income with a family size of
3 will yield an initial monthly payment of about $392, since 150% of
the poverty line is $28,635. But if each spouse files separate returns
with $30,000 in income, that income is much closer to the $28,635
threshold, yielding much lower initial monthly payments of about $17 each, or a
total of $34.
In a community property state, each spouse is assumed to have earned
half of the joint income. Thus married couples living in community
property states who repay their student loans under IBR will almost
always have lower monthly payments if they file separate income tax
The main drawback with filing separate returns is that some tax
deductions and exclusions, like the student loan interest deduction,
are restricted to couples who file joint returns.
(In a joint consolidation loan, if one spouse is unable to work
because of health issues, and that spouse obtains a total and
permanent disability discharge, only the portion of the joint
consolidation loan that is attributable to the disabled spouse's loans
will be discharged, per the regulations at 34 CFR 682.402(a)(2). The
other spouse will remain obligated to repay the rest of the joint