Married With Student Loans

There usually aren’t too many scenarios where Married Filing Separately materially benefits either spouse. A scenario in which Married Filing Separately tends to be applied is when a couple has decided to live separately.

But another one has become more prominent, due to the profound impact it can have on debt management: The intersection of student loans with income.

Married Filing Separately allows for the direct consideration of income-based repayment, and buffers their spouse from any implications that may result if the loans go into default.

For paying off student loans, the ability to establish income based repayment is more easily established by Married Filing Separately.

The other benefit of Married Filing Separately for both parties when student loans are involved is if they are federal student loans. Since federal student loans can be forgiven if an individual goes into public service, the benefit is definitely greater due to being able to take advantage of the Federal Student Loan Forgiveness program.

However, it’s important to know what benefits of Married Filing Jointly would diminish the benefit of Married Filing Separately.

A significant one is the Student Loan Interest Deduction.

Another one is your loans will likely get paid off faster if your income based repayment is formulated by your overall gross income.

This is because your repayment amount will be higher due to a higher gross income, hence paying off the balance sooner in the long run, saving you significant money in interest payments.

So, Married Filing Separately is a benefit if you are looking to optimize the lowest monthly payment, but the offset is longer timeframe for paying off balance and more interest paid through time.

But, it would allow for other goals to start earlier due to more cash flow available. Examples are contributing to retirement accounts or buying a home.

Inversely, Married Filing Jointly increases the monthly payment, requiring more cash flow through the course of repayment, but less overall interest is paid due to shorter time frame. Because less funds are available as a result, contributing to retirement accounts or buying a home will take longer to gain traction.

At the end of the day, each couple needs to determine which path is optimal for them by considering their overall financial picture and financial goals.