How marriage affects student loans

A union can trigger changes to a borrower's loan payments and eligibility for related tax breaks.

  • By Cheryl Winokur Munk,
  • The Wall Street Journal
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Marriage can change everything for couples—in some cases even their student-loan payments.

With Federal Reserve data showing that student debt in the U.S. stood at $1.46 trillion in the fourth quarter, this is an issue that could trip up more young newlyweds in the coming years.

Most couples are well-aware that a partner’s college debt might impact their ability to buy a home, get other loans or start a retirement nest egg. What is less-understood is that marriage also can trigger changes to one or both partners’ actual student-loan payments and loan-related tax breaks.

Here is a look at some of the potential issues:

Student-loan payment amounts could change

Borrowers on income-driven repayment plans for federal student loans must update their income and family size annually. In some cases, marriage can make partners ineligible for income-based repayment based on the couple’s combined income, or it can increase their monthly payments, says Persis Yu, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project.

Couples can use the Education Department’s federal student-loan repayment estimator to better understand what repayment plans they may be eligible for and compare estimated monthly payments based on variables such as their respective incomes, tax-filing status and state of residence.

The ripple effects of filing taxes separately

Filing separate tax returns can be a workaround for couples whose combined income is too high to qualify for income-based repayment. Some of the income-based repayment plans use only the borrower’s income when determining eligibility for couples who file their taxes separately. However, married couples need to weigh a decision to file separately for this purpose carefully, since the decision could impact other credits and deductions, potentially negating the savings they are hoping to achieve.

For instance, married taxpayers can only deduct interest on student loans paid if they file a joint return; they can’t claim the student-loan interest deduction if they file separately as a married couple, says David Oransky, principal and founder of Laminar Wealth LLC, a fee-only financial planning and investment advisory firm in Chesterfield, Mo., who is also a member of the American Institute of CPAs’ Personal Financial Planning Executive Committee.

Couples who live in one of the nine community-property states may have additional considerations when it comes to filing separate tax returns for income-driven repayment plans. It can get tricky due to the unique nature in which these states handle income earned by couples, says Michael Lux, founder of the Student Loan Sherpa, a website dedicated to student-loan education, strategy and borrower advocacy.

Student debt taken out after the marriage

Some couples may have plans for one spouse, or both, to go back to school after they marry. If they are going to borrow to do it, they should be aware of certain potential complications that can arise. For example, in a community-property state, if one spouse defaults on student-loan debt taken out after the marriage, creditors may be able to go after both partners’ wages.

Student loans taken out during the marriage also can lead to complications if a couple decides to divorce, especially if one spouse cosigned a student loan on the other’s behalf. If the couple ends up divorcing and the main borrower fails to make payments, the cosigning ex-spouse is legally responsible.

Some lenders may release a cosigner under certain conditions, but each lender has its own approval process. Another option may be to refinance the loan so that the ex-spouse is no longer a cosigner, but this leaves the parties “at the mercy of the private refinancing companies,” Mr. Lux says. “If the spouse can’t be approved, you’re stuck.”

Defaulting on the loan

If a spouse defaults on his or her federal student loans during the marriage, the borrower could be subject to wage garnishment, wreaking havoc on the couple’s finances. Federal tax refunds also could be withheld, resulting in another potential financial stress. What’s more, defaulting could destroy the borrower’s credit score, making it more difficult for the couple to take out a mortgage, for example.

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