How You File Taxes Matters for Student Loan Borrowers
Tax season might not be the most exciting time of the year, but if you have student loans, how you file your taxes can have a big impact on your repayment plan. If you are on an income-driven repayment (IDR) plan or considering switching to one, your tax filing status could affect your monthly payments, how much you pay over the life of your loan and if you get loan forgiveness. Let’s break it down!
Why Your Tax Filing Status Matters
If you’re on an IDR plan, your monthly payment is based on your discretionary income, which is calculated using your Adjusted Gross Income (AGI). The way you file your taxes—either as single or married filing jointly—can make a big difference in your AGI and, therefore, your student loan payment.
Filing Single vs. Married Filing Jointly: Which One is Better?
If you're married, choosing between married filing jointly (MFJ) and married filing separately (MFS) is a strategic decision. Here’s how each affects student loan borrowers:
Married Filing Jointly (MFJ): Your spouse’s income is included in your AGI, which could increase your IDR payment. While this could be beneficial for tax benefits, it might mean higher student loan payments.
Married Filing Separately (MFS): Some IDR plans (like PAYE and IBR) will only consider your individual income, which could lower your monthly payments. However, this could also mean losing certain tax benefits, like the student loan interest deduction.
Examples of How This Works in Real Life
Let’s look at a couple of scenarios to see how tax filing choices impact student loan payments.
Example 1: Married and going for Public Service Loan Forgiveness (PSLF)
David and Rachel are married. David has $100,000 in student loans and earns $50,000 per year, while Rachel earns $60,000. David is pursuing PSLF and is on the Income-Based Repayment (IBR) plan.
Filing Jointly: Their combined AGI is $110,000. This increases David’s discretionary income, raising his monthly payment to around $450. Since PSLF forgiveness depends on making lower payments over time, a higher monthly payment could result in less debt being forgiven.
Filing Separately: Only David’s $50,000 income is considered, lowering his payment to about $200. Over 10 years, this strategy allows him to pay less overall while maximizing the amount forgiven under PSLF.
For borrowers pursuing PSLF, choosing to file separately could mean thousands of dollars more in loan forgiveness, even though it might result in higher tax liabilities. It’s a trade-off worth considering.
Example 2: Parent PLUS Borrower Using Double Consolidation Loophole
Lisa is a parent who took out Parent PLUS Loans to help her child pay for college. She owes $90,000 and earns $55,000 per year. Normally, Parent PLUS Loans aren’t eligible for IDR plans, but Lisa used the double consolidation loophole to become eligible for the Income-Based Repayment (IBR) plan.
Filing Jointly: If Lisa files jointly with her spouse, who earns $75,000, their combined AGI is $130,000. This increases her IBR payment to $819 a month, making it unaffordable.
Filing Separately: Only Lisa’s $55,000 income is considered, lowering her IBR payment to $263 a month. This allows her to manage her loan payments while working toward forgiveness after 20 years.
By using double consolidation and filing separately, Lisa is able to reduce her monthly payments and maximize forgiveness under the IBR plan.
Other Tax Considerations for Student Loan Borrowers
Student Loan Interest Deduction: You may be able to deduct up to $2,500 in student loan interest if your income qualifies.
Public Service Loan Forgiveness (PSLF): Lower monthly payments mean more debt forgiven after 10 years of qualifying payments.
State Taxes: Some states follow different rules when calculating income for IDR plans.
Final Thoughts: Plan Smart for Tax Season
If you’re a student loan borrower, tax season isn’t just about getting a refund—it’s about making smart financial moves. Consider working with a tax professional who understands student loans, especially if you’re married and on an IDR plan. A little planning now can save you thousands in the long run!
Do you have questions about how your taxes impact your student loans?