Filing your federal tax return married filing separately will affect the monthly payment amount of your federal student loans. It will have no impact on your private student loans, which don't offer income-based repayment plan options.
The exact impact filing taxes separately will have on your student loan payments will depend on:
- your spouse's income (more specifically, their adjusted gross income) and
- your student loan repayment plan.
Each income-driven repayment plan (IDR) treats your tax filing status differently.
Let's talk about that next.
Income-Based Repayment (IBR) Plan
The income-based repayment plan won count your spouse's income if you file taxes jointly.
The IBR plan counts your spouse's income only if you file taxes jointly.
But, the IBR plan does require your spouse to sign the Income-Driven Repayment Plan Application.
So if you're applying for IBR or if you're completing your annual recertification to get your new repayment amount, your spouse will have to sign the application.
Signing the application won't obligate them to repay your student debt.
Their signature is required to verify how you filed your tax return.
But what if your spouse refuses to sign? In that event, you may be in a situation where you don't have reasonable access to your spouse's financial information. And, in that event, you'll be treated as single, and your spouse wouldn't be counted in your family size.
Revised Pay As You Earn (REPAYE) Plan
The REPAYE plan treats married couples the same no matter if they file taxes jointly or separately: it will always use their joint income.
More specifically, the REPAYE plan will use the joint AGI from your federal income tax return.
Because the plan uses both married borrowers' income no matter how they filed taxes, you may end up with a lower payment if you repay your student loans under the IBR plan.
To find out which repayment plan will give you the lower monthly payment, try using the Department of Education's Repayment Estimator at studentaid.gov.
Using that simulator, you'll be able to get an estimate of which plan will give you a lower monthly payment. After you get that estimate, compare your annual payments to your tax liability if you file separately or jointly. (A tax professional should be able to give you an estimate of your potential tax bill and any tax benefits based on which filing status you choose.)
Doing this will give you a solid idea of which is the best strategy for you.
Pay As You Earn (PAYE) Plan
One of the advantages of the PAYE plan over the REPAYE plan is that it counts your spouse's income only if you filed a joint return.
So if you filed separately, you get the benefit of the lower payment the REPAYE plan offers due to how it calculates your discretionary income.
Both plans use 10% of your discretionary income to calculate your monthly payment. The IBR plan, on the other hand, uses 15%.
This difference in the repayment plans is why the PAYE plan is the best of all the IDR plans.
Unfortunately, few student loan borrowers qualify for the plan. It's only available to "new borrowers".
The Income Contingent Repayment (ICR) Plan
The ICR plan will count your spouse's income only if you file taxes jointly.
The ICR plan doesn't include your spouse's income if you file taxes separately.
Let's talk about the ICR plan for a second.
This plan is the worst of all the income-driven repayment options. It leads to a higher monthly payment year after year.
The only people who should choose this repayment option are those who have student loans made under the Parent Plus Loan Program.
The income-contingent repayment plan is the only income-based plan Parent Plus Loan borrowers qualify for.
What if your spouse also has federal student loans?
If both you and your spouse have federal student loans, the IBR plan calculates your payment based on two things:
- you and your spouse's joint federal student loan debt and
- your joint income.
The benefit of this is that you each end up with a monthly payment that considers the other's student loan debt without making you liable for each other's debt. (Borrowers who live in a community property state may have other considerations.)
The drawback of filing separately is that, depending on your tax bracket, you may lose certain tax benefits the IRS offers joint filers (e.g., increased student loan interest deduction, American Opportunity tax credit, etc.).