If you are dating and the relationship is getting serious, the new dating question among millenniums may include questions about your student debt amount? Due to the rising cost of education, more young people are graduating from college and post graduate school with significant debt. This amount grows larger with each passing year.
This new issue can be a deal breaker for some people especially since it will become part of the future family budget, if marriage occurs. The amount of debt can also be overwhelming for some couples especially if they enter the relationship with little to no debt compared to their future partner. It creates a possible inequality from the beginning that needs to be discussed.
How do they make a dent in their student loan debt and figure out which repayment plan is the best for them? Understanding the shear amount is just the start for the couple. As part of their budget discussion, a review of the repayment options and how to file their taxes should all be analyzed.
Lack of Financial Knowledge and Advice
According to a 2016 Lendedu survey, approximately 85 percent of the students relied on their parents for financial knowledge on the financial aid and student loan process. That could be one of the reasons for the lack of financial literacy since most of the parents giving the advice had very limited or no student debt. The loan repayment and forgiveness process is very complex. It is highly dependent on your income, employer, and tax filing method.
Another part of the problem is the colleges and loan servicers are unable to give personal financial planning advice to a couple jointly. The advice can only be given to the individual loan borrower and they are unable to present a joint strategy for the couple. Once a student gets married, the added complexity of tax filing is added to the repayment process. This change makes getting the right information more difficult.
Understanding your student debt is more than just paying your monthly payment. It involves making sure you have picked the right repayment method, understanding how your taxes are being filed and knowing your debt to income ratio. The last number is important because the majority of young couples will eventually buy homes. The first step involves compiling your list of debt so that you both can see and understand the total amount of federal and private student loan debt. Your federal loan information is available on the National Student Loan Data System (NSLDS.ed.gov).
The borrower can go to this website and then download their federal student loans using their FSA ID. Their private student loans can be found in their credit report. This source should list all of your outstanding loans both private and federal. Once this is accomplished, the real work begins.
Filing Taxes as a Married Couple
Filing your taxes as a married couple with federal student loan debt requires a more detailed analysis. Each person’s adjusted gross income will dictate his or her monthly payment if an Income Driven Method is being used. If you file married and joint then both incomes will be considered, no matter who has debt.
It may be beneficial to file your taxes married and separate, if one student has more debt or if you may qualify for certain loan forgiveness programs.
As an example, if a person has consolidated their federal student loans and is repaying their student loans using Income-Contingent plan, Income-Based Repayment plan or the Pay As Your Earn plan, the couple will have to decide whether to file joint tax returns or file married and separate. If the couple files jointly, it would result in a higher monthly payment under the above income-driven repayment plans.
If this decision is made, then a possible increase in income tax could result. When a married couples files married and separate, they then lose some deductions, such as the student loan interest deduction.
Besides evaluating the monthly student loan payment, the couple will have to also explore the different tax obligations, depending on how the taxes are filed. The couple will need to establish the cost number of filing married and joint verses married and separate. It is important to understand this number and determine the tax for the household using both scenarios. Compare the higher overall tax for the household in relation to the savings of IDR plan. Many CPAs are purely looking at only the tax consequence. A married couple needs to compare both savings in total.
Creating a long term plan and comparing the two scenarios would establish which way the couple would file their taxes.
Picking Your Repayment Plan
Picking the correct repayment plan can be confusing as there are currently 9 repayment plans and they all have their own terms and lengths of time. Currently, the repayment plans available for federal loans student loans are as follows: Standard 10 year Repayment Plan, Extended Repayment Plan, Graduated Repayment Plan, Extended Graduated Repayment Plan, Income-based repayment (IBR), Pay As You Earn (PAYE), Revised Pay As Your Earn (REPAYE), Income Contingent Repayment (ICR), and Income Sensitive Repayment.
In our article title, “Student Loan Repayment: Making the Best Decision”, each of the repayment plans are discussed in detail. If you have not yet consolidated into a plan then before doing so you need to consider your type of job, income level and the specifics of each of the repayment plan.
We are seeing more reports about how student debt is delaying the financial future for many young adults. Life goals such as home purchase, having children and saving for retirement are all being delayed due to the level of student loans. Creating a budget should be on the top of the list for every person. When a couple gets married, we often hear of the wedding budget, the venue and the cost associated with the big day. This often takes preference to the new family creating a budget or the delicate question of student debt.
Unfortunately, student debt it is the new reality for new couples. Finding a solution to how they jointly will handle this debt is a discussion couples need to understand as they start their new life and incorporate this monthly amount into their family budget.