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How To Pay Student Loans If You're Married Part 1 - YouTube
Channel: New Money New Problems
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welcome back! today we're continuing our
series on federal student loans. we've
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covered a lot of things. we've covered
income driven plans, we've covered how to
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calculate your discretionary income and
today we're going to start with a
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section on a marriage and student loans:
how do they affect your payment, how are
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they affected in death and divorce,
private loans vs. federal loans, etc. so
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hopefully today we can provide some
insights on how these things will work
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in your situation. let's get started. today
in the first video on the marriage part
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we're going to focus on how these are
how these payment plans, the income
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driven plans that we've talked about, are
affected by your marriage.
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so today specifically we want to talk
about how that affects your payment when
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it comes to the income based repayment
plan the revised page you earn and the
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pay-as-you-earn. and to do this, to tell
you the differences it will be helpful
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if I give you an idea of what I
typically see. so again this is not a
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recommendation but typically I have to
lump these into two groups when it comes
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to marriage, because the income based
repayment plan and the pay-as-you-earn
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plan are things that I typically see
used for couples where only one in that
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relationship has significant student
loans and the other spouse has little to
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no student loans at all. now conversely, the revised pay as you earn is typically seen by
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me for couples who both have significant
student loan debts. and why is that? well
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if you lump the first two together the
income based repayment plan and the
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pay-as-you-earn plan, those two plans
allow you to manipulate whose income is
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considered in the calculation for your
payment each month, whereas the revised
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pay as you earn considers both of your
incomes no matter what. so we'll talk
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about how that plays into the choice
that you make for your payment plan but
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I do want to put those two separate
groups in your mind
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and we'll start with the first two:
income based repayment and pay-as-you-earn,
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because we want to tell you how you can
only use your income if that's
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appropriate and how that
affects your payment plan if your spouse is
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having his income or her income included
in that payment. so on the first two, to
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recap a bit, let's
reference something that we talked about
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in the first videos. so the three income
driven plans that we've been referring
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to, all of them ask you to pay a
percentage of your discretionary income
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each month towards your loans, and that
typically is 10 to 15% based on the plan
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that you have, and 20 to 25 years is how
long you have to pay based on the
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type of plan that you're under. so when
you look at the formula for calculating
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that discretionary income, if you recall,
it is your salary, your household salary
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minus 150% of the
federal poverty line for the number of
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people in your household. so common sense
will tell you that if you have more
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salary, if you have your spouse's salary
included in that calculation, your
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payment is going to be higher because
your discretionary income is going to be
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higher. so first I'll tell you how you
can avoid having their income included
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and then we'll get to whether or not
it's worth doing because of the
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consequences that come with that
strategy. first how do you avoid having
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it included? well the first way is you can
talk to your student loan servicer and
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every year when they send you the
application to reapply and recalculate
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your payment for these plans, they may
have something on that application that
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will allow you to say that you don't
have access to your spouse's income
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information. you may not have a tax
return, they may be a partner in a
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business and they get a draw and it's
not clear until after you file the end
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of the year taxes what they actually got
paid. and if that is the case you can
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file that you don't have access to that
information and they won't include it
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when they do your calculation, but you
still get the benefit of having them as
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a person in your household when it comes
to the federal poverty line. so the
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benefit is the more people that are in
your house the higher the federal
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poverty line is, so in this situation you
get the lower salary only using yours
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but you get the benefit of having them
in the household for your discretionary
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income calculation. now again this is the
honor system so I wouldn't get in the
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habit of lying
to your student loan servicer. this is
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truly for people who do not have access
to their spouses payment information. the
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second way is you can file your taxes
married filing separately. now I am not a
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CPA I'm not a tax professional and I
would encourage you that if you're even
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considering this technique to do it
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under the management of
a tax professional. but basically you can
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file taxes a number of ways in our
country. and for married couples two of
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those ways are married filing jointly,
which can be a little more forgiving in
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terms of the tax ramifications, or you can file married
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filing separately. so you file your
returns and it doesn't have anything to do
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with your spouse's information. now again
the reason that you want to use a tax
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professional for this is because there
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are a number of things you need to know
before you file your taxes separately.
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there are deductions that you might not
qualify for, you could potentially expose
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yourself to higher income taxes. but when
it comes to your student loan payment
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plans, filing married filing separately
means that only your income would be
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included in that calculation. so while on
the one hand that would be good for your
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student loan payment, you would want
to work with that CPA or that tax
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preparer and have them run a scenario
that basically asks, 'am i reducing my
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loan payment but costing myself more in
taxes?' finding that breakeven basically says
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am i saving myself $100 a month on my
student loan payment by not including my
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spouses pay, but I'm costing myself $200
a month in increased taxes by taking up
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this strategy? so if you can't find those
calculations, if you can't find that
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break-even then you probably don't want
to be doing this on your own. you want to
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make sure you have someone helping you
along the way but it is a way to
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possibly lower that student loan payment.
because of this you can start to see why
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people who only have one spouse in that
relationship that has student loan debts
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would be gravitating towards these plans.
because if my spouse doesn't have a loan
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then why would I want their income
included when I can potentially find a
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way to have that lower payment just
based off of my income? if they don't
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have a payment of their own and it's
just yours that you're considering then
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this is something that might work out
for you. but again it's no guarantee and
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you want to work with a professional to
figure it out. now on to the second group.
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the revised pay as you earn plan sits alone in
the second group and the reason for that
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is because no matter how you file your
taxes, no matter whether you like your
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spouse or if you don't know what they're getting paid,
they are going to include both incomes
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in the payment for your discretionary
income calculation under the revised
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pay-as-you-earn. because of this I see
this most often with spouses who both
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have significant student loan debts and
as we go through the details it'll make
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sense why. if you think about it this way,
let's say that I have a ton of student
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loan debt and my wife has a smaller
amount.
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well her smaller amount probably could
be paid off under a standard repayment
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plan, a 10-year plan a 15-year plan, because it's likely that
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she makes enough and can pay enough to
pay off those loans in full. so if that
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were the case, me doing an income based
or income driven plan that asks for 10%
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of our household income might
not work out because then we would have
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her standard payment plan AND 10%
of our income going towards my plan. so
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it just puts you in a situation where
you're paying more than you might
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typically need to. but if both of us have
significant debts then it's likely that
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both of us we're going to be gravitating
towards an income driven plan anyways. so
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the revised pay as you earn plan makes
sure that they take steps to ensure that
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both of your loans are considered and
that you don't exceed 10% of
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that discretionary income when you have
both of your loans in the same pot. now
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when I say the same pot I don't mean
that actually you go from two loans to
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one loan: you will always have separate
loans. but what the revised
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pay-as-you-earn plan does is takes
the balances that you owe, puts them
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into one not literal pot but they put
them together and they assign a
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percentage based on the amount of debt
that each of you brought to the table. so
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for example if we owe
two hundred thousand dollars combined,
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and 75% of those loans are my loans and
25% are hers then they're going to make
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sure that we have a monthly payment that
doesn't exceed 10% of our income
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but that monthly payment will make sure
that 75% of the payment goes towards my
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loans and 25% goes towards my
wife's loans. that's how they make sure
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that even though your loans aren't in
one pot that your payment is going
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towards the right places and it's going
in a proportionate amount to what each
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of you brought to the table. now that
we've talked about how to go about
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having your spouses income included or
excluded, it is important that we talk
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about what happens if both of us make a
large amount of money? how does that
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affect these student loan payments? and
again we have to go back to the groups
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to explain this. the first two that we
went over, the income based repayment
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plan and the pay-as-you-earn plan,
they put caps on the amount that you owe,
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meaning that even though those
calculations are supposed to say that
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you pay 10% or 15% of your
discretionary income under these two
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plans, if that payment means that you're
exceeding what you would pay under a
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10 year repayment plan then they do not
make you pay based off of your discretionary income.
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for example if you find out that you
could have paid $1,500 a month and paid
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off your loans within 10 years under a
standard plan, but when they do the
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discretionary income calculation then
your payment would have been $1,800 a
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month, they're not going to make you pay
the $1,800: you would pay the lower amount
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and go to a typical standard 10 year
repayment plan. but under the revised
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pay as you earn, there are no caps. so
even if you and your spouse make a
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million dollars combined, whatever that
calculation says your discretionary
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income is you will have to pay 10% of that amount no matter how
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quickly or how fast it would have made
you pay off your loans under a standard
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plan. again that is why you typically see
spouses where both carry significant
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student debts going toward the revised
pay as you earn, because it's
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unlikely that if they have a
large income
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that their discretionary income would
have had them paying off their loans
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faster than under a ten-year plan. that's
it for today, we've covered a lot of
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information and typically we focused on
how it affects your payments. so in part
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B of this series we're
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going to cover things like what's
affected by my student loans in terms of
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death, if I go to a private loan how does
that affect my student loans and my
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spouse. and we'll finish up on the
marriage part and then we'll finalize
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the series in the next couple of videos.
so I know it's a lot but it's a lot of
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information and it's important to a lot of
people out there. so again if you liked
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what you heard please share with as many
people as you can. we want to help as
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many people as we can. if you have a
topic that you want consider for a
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future video you can submit it by going
to my website www.brentonharrison.com and
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under the blog section you can click the
question there and fill it out for
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topics you want to be considered in the
future. I hope you guys tune in next time
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and I'll see you then!
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