Taxpayers who pay their student loans using an IBR, ICR, or PAYE repayment plan should be extra careful when filing their tax returns. The tax filing status you chose can affect your repayment plan.
Married taxpayers should determine whether filing a return with their spouse, using “married, filing jointly,” or keeping their income separate by filing “married, filing separately” will alter their monthly payments. Opting for one filing status instead of the other may make your payments a little less expensive each month.
Some monthly student loan payment options, such as income-based repayment, are determined depending on your current household income and family size. This option usually offers lower monthly payments than a Standard repayment option. Income driven repayment usually varies between 10% and 20% of discretionary income. Discretionary income is calculated once your basic living expenses, such as rent and utilities are deducted. The loan holder will review your repayment plan each year and re-determine the appropriate monthly payment, depending on your tax return.
Examples of income driven repayment plans:
- Pay as You Earn Plan
- Income Contingent Plan
- Income Based Plan
Your loan financer will set your monthly payment amounts based on the information obtained from your tax return. The important factors in determining your payment amount are your income, family size, and current debt amounts.
Filing your taxes using the status “married, filing separately”, means your loan provider will only consider the income that you earn. Your spouse’s income is only used to determine your monthly payments if you file a joint return. If you earn less than your spouse, filing a separate tax return can significantly lower your monthly payments on an income-based repayment plan.
For Example:
A married couple has two children. One spouse makes $50,000 annually, with no student loan debt. The other spouse makes $25,000 per year, with debt of $60,000 in student loans being repaid through an Income Contingent Repayment program. If the student spouse files a separate tax return, their payment can be a little as $25 each month. By filing a joint return, the monthly payment rises to approximately $600
