The outstanding student loan debt in California sits at a staggering $135 billion as of December 2019.1 With so many students graduating with debt, even if you don't personally have any debt, the chances of finding a life partner with some student debt of their own are high. Whether it’s a couple thousand or six figures, student loan debt can be a life-altering obligation that affects individuals and couples for decades after graduation. In a recent survey, 12 percent of individuals with student loan debt even delayed getting married because of it.2 Particularly in the Bay Area, where the cost of living is high, it is important you and your future spouse understand the implications of your debt situation and communicate with each other.
Whether you’re one of those people who have considered putting off your nuptials or you’re soon marrying into debt, below are a few facts you should know before saying “I do.”
Fact #1: Your Marriage Status Can Affect Your Monthly Payments
If you’re paying back federal student loans using an income-driven student loan repayment plan, how you file your taxes (jointly or separately) could have a major impact on how much you’re obligated to pay back monthly.
There are four types of income-driven federal repayment plans:
- Revised Pay As You Earn Repayment Plan (REPAYE Plan)
- Pay As You Earn Repayment Plan (PAYE Plan)
- Income-Based Repayment Plan (IBR Plan)
- Income-Contingent Repayment Plan (ICR Plan)3
Depending on the type of repayment plan you’ve opted for, your tax filing status could determine how much you’ll be paying per month. For example, some repayment plans look at the combined adjusted gross income (AGI) of both you and your spouse only if you are filing jointly, while others may look at your combined AGI whether you file jointly or separately. With a combined AGI, your payments could be higher than when you were filing as a single individual.
For some plans, filing separately could mean your repayment plan is only looking at your individual income, not a combined AGI of you and your spouse. This would mean your monthly payments would be lower. Alternatively, if you and your spouse both have student loan debt and file together, in some cases your monthly payments would be lower to accommodate the additional debt.
When it comes to deciding the most efficient filing option for you, your spouse and your student loan debt, you may want to consider working with a tax professional. In some cases, the tax credits or deductions you may miss out on by choosing to file separately could have outweighed the higher monthly debt payments.
Fact #2: You May Not Be Legally Liable For Your Spouses Debt
While there’s nothing romantic about it, it’s important to understand your legal obligation and responsibility toward your partner’s student loan debt. If your partner took out federal student loans before you were married, you, as the spouse, are (in most cases) not responsible for those loans. If your partner took out private loans, it could depend on the policies of the loan provider.
However, if you co-signed for the loan before you were married, you likely will be held responsible for those loans should your partner default. In addition, if your partner took out the loans after you were married, in California you could be liable as these are considered jointly owned community property. Other community property states include Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.4 The law can be complicated when it comes to who’s responsible for what, especially if a divorce is involved. Should you need to look further into your obligation as a spouse, you may want to seek professional legal counsel or speak with a financial advisor.
Fact #3: You & Your Spouse Cannot Consolidate Your Student Loan Debt Jointly
From 1993 until 2006, the Department of Education granted joint consolidation loans to married couples, allowing these couples to combine their student loan debt into one joint loan, making both parties liable for the amount - even in the event of a divorce.5 While there was some benefit to the ability to organize both spouses student loan debt into one tidy sum, it was found to have multiple downsides such as:
- Leaving a spouse responsible for the other’s debt in the case of a divorce or separation
- Spouses losing the ability to defer payments (such as in the event of unemployment) unless both spouses qualified
- One partner is unresponsive or unwilling to pay, leaving the other responsible
- Limiting eligibility for utilizing income-driven repayment plans
While as of November 2019 it has yet to be passed, a bill was introduced on May 14, 2019 called the “Joint Consolidation Loan Separation Act,” which proposes the ability for couples who had previously consolidated their loan debt to once again legally separate their debt.6
Getting married is an exciting milestone for all families, and it’s one that should bring about joy and celebration. But as you transition into married life with your partner, the debt you’re bringing into the marriage shouldn’t be ignored. Be honest with your partner about how much student loan debt you’re facing, and research your options together to build a plan of action moving forward.
Sonoma Wealth Advisors is a registered investment adviser and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. The information presented is for educational purposes and believed to be factual, but we do not guarantee its accuracy and it should not be regarded as a complete analysis. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice. An investment adviser representative should be consulted directly before implementing any investment strategy. Investments are subject to market risks and the potential loss of the entire principal amount invested. Past performance is no guarantee of future results.