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:
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.
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.