The latest income-driven repayment (IDR) plan has been touted as the most generous student loan plan ever — and it could give greater flexibility to married couples with student debt.
Dubbed Saving on a Valuable Education (SAVE), this new IDR plan replaces an existing IDR plan called REPAYE. It caps monthly federal student loan bills at 5% to 10% of your discretionary income based on your loan type, prevents ballooning interest, forgives remaining student debt after you make payments for 10 to 25 years and more.
And when it comes to married borrowers, SAVE includes two new rules:
- Spouses who file taxes separately exclude their partner’s income when calculating their individual monthly payments for SAVE.
- Spouses no longer need to co-sign IDR applications, regardless of filing status.
Here’s what you and your spouse should know before saying “I do” to the new IDR plan, and what to consider if you’re weighing whether to file taxes jointly or separately.
Married filing taxes jointly vs. separately
With SAVE, your spouse’s income and federal student debt won’t impact your payment calculations — but only if you file taxes separately. Because SAVE assigns you a payment that’s between 5% and 10% of your discretionary income, this could reduce your monthly payments if your spouse earns a higher income than you.
This is a big change from the previous REPAYE plan, which based student loan payments off your joint income regardless of your tax filing status, says Kyra Taylor, a Boston-based staff attorney focused on student loans at the National Consumer Law Center.
Even if filing your taxes separately might lower your student loan payments under SAVE, doing so could also impact important tax breaks available to joint filers, explains Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting based near Chicago.
“The disadvantages are numerous,” says Luscombe, which may explain why it’s a less popular option.
In the 2020 tax year, 3.9 million married people filed separate returns, a fraction of the 55.3 million married people who filed joint returns, according to the latest IRS data.
Tax breaks that are generally unavailable to married couples filing separately include education tax credits like the Student Loan Interest Deduction, the American Opportunity Tax Credit and the Lifetime Learning Credit. These individuals may also be ineligible for the Child and Dependent Care Credit.
It’s also important to note that your household size impacts IDR calculations, and a larger family could mean lower payments. If you file separately, your spouse won’t be counted as a household member. The Federal Student Aid office’s loan simulator can help you estimate your payments under SAVE based on income, tax filing status, family size and other factors.
But taxes are complex and every family has a unique situation, so it’s best to contact a professional tax preparer or use a tax preparation software like TurboTax to run the numbers before you make a filing decision, advises Luscombe.
Spouses no longer need to co-sign IDR applications
Spousal signatures are no longer required for almost all types of IDR applications, regardless of whether the married borrower files their taxes jointly or individually. This broad IDR update accompanies the roll out of SAVE.
Previously, married borrowers were required to get their spouse’s signature on IDR applications, says Taylor.
By signing, a spouse pledged that all information on the application, like income and family size, was accurate. However, it did not make the spouse responsible for repaying the loan.
Removing the spouse signature requirement makes it easier for married borrowers to apply for an IDR plan, Taylor explains. “Now, all they have to do is submit their own information, and their spouse won’t have to co-sign the application.”
The only exception: when a couple is repaying their loans jointly under an IDR plan called Income-Contingent Repayment (ICR).
How do other IDR plans compare?
Borrowers can currently choose from four different IDR plans. Unlike REPAYE, which SAVE is replacing, the three other plans also allow you to exclude spousal income if you file taxes separately.
These plans are Pay As You Earn (PAYE), Income-Based Repayment (IBR) and ICR. Each plan has different rules around monthly payment caps, how long it takes to reach forgiveness and more, so check out the details of each IDR option before signing up.