Married, File Joint or Seperate

[abarone]

This will be our first year filing married and we have some concerns about it will impact student loan repayment.    I make 220K and have ~$123K in debt at an average interest rate of 4.5%.  My husband makes 50K and has ~$100K in debt from graduate school at an interest rate of ~6.7%.  Neither of our salaries will change too much in the foreseeable future.  He is in an IBR plan.  If we file jointly, we will get a refund, however, I think shortly after, he will be kicked out of the IBR plan.  True?  If we file separately, we will owe several thousand.  We'd obviously like to pay both off, however, we are planning to buy a house in a competitive market this spring and worry that high debts may scare off a seller with multiple offer and also, we would lose some flexibility in how much we can spend on a mortgage.

I'd appreciate any thoughts on this type of situation, also any consequences I may not have thought of.

[cgossage]

First, welcome to the forum.  I'll try and take your post in order.

First, is he on IBR or is he in PAYE, REPAYE, or another income-driven plan?  He won't get kicked out of the program, but his payment will max out at what he would have paid under the standard payment plan if he is on IBR or PAYE.  Based on the information you provided his standard payment should be around $1,150/mo.  If he is on REPAYE, his payment can increase above this threshold and will ~$1,900/mo.  Filing separately can reduce your payments under IBR and PAYE but will have no impact if you are on REPAYE.  The downside as you figured out is your taxes will increase substantially.  The only way I would recommend filing separately is if you are attempting to receive Public Service Loan Forgiveness of a large student loan balance, which it doesn't sound like you are.

I don't have all of the information, but since your incomes are where you to expect them to be in the future, you should refinance your husband's loans at a lower interest rate.  If you use a 10-year payment plan, your payment should be lower than $1,150/mo.

I would think twice about buying a house with your current student loan burden, but if you are set on doing it, you could always get a physician mortgage that doesn't count student loan debt against you.

[Peds]

you dont get kicked out of IBR.

married filing separately rarely helps.

with 200k in debt....i would wait on the house.

[abarone]

Thank you both, that is helpful. I misspoke when I said kicked out of the IRB plan; what I meant was that he would no longer qualify for income based repayment and would need to pay the standard payment.

[cgossage]

Peds wrote:

I would think twice about buying a house with your current student loan burden, but if you are set on doing it, you could always get a physician mortgage that doesn’t count student loan debt against you.

Click to expand...

No problem.  Terminology often gets confusing when discussing student loan payment plans.

[DMFA]

abarone wrote:

This will be our first year filing married and we have some concerns about it will impact student loan repayment.    I make 220K and have ~$123K in debt at an average interest rate of 4.5%.  My husband makes 50K and has ~$100K in debt from graduate school at an interest rate of ~6.7%.  Neither of our salaries will change too much in the foreseeable future.  He is in an IBR plan.  If we file jointly, we will get a refund, however, I think shortly after, he will be kicked out of the IBR plan.  True?  If we file separately, we will owe several thousand.  We’d obviously like to pay both off, however, we are planning to buy a house in a competitive market this spring and worry that high debts may scare off a seller with multiple offer and also, we would lose some flexibility in how much we can spend on a mortgage.

I’d appreciate any thoughts on this type of situation, also any consequences I may not have thought of.

Click to expand...

Your debt/income is usually calculated based on monthly payment and not by total amount owed.  You can game that MFS/PAYE and with longer terms; however with those come with longer rates and more wasted on finance charges.  All a seller can see is what you're pre-approved for on your note from your lender, which you usually just have them edit for each offer you make.  The seller has no clue what your finances are.

IBR is horrible.  Try PAYE if you're trying to pay less, but honestly, with that horrible rate, you should consider refinancing.

The foundation seems a bit shaky to try to buy a house at the moment.  It seems like you'd need to put zero or very little down, would need a non-conforming "doctor loan" which often comes with a higher interest rate in order to avoid PMI.

To be honest, I think you should really consider sitting down with someone and tackling your financial issues one by one.  You make $270,000 a year.  $223,000 of debt should be easily manageable over 5-10 years.  Assuming you both refi and get top rates (I'll use SoFi to analyze), your payments would be:

• 5-yr fixed at 3.25%: $4,031.84/mo ($48,382.08/yr)


• 10-yr fixed at 4.375%: $2,297.72/mo ($27,572.68/yr)

I can understand if you can't quite rearrange your current spending to 20% of your gross income, If you ask me, an individual should definitely be able to spend 10% of one's gross income on student debt and be just fine.  Let's look at your income from a different perspective:

• Assuming $270,000 gross, std deduction $24,400, and both maxing retirement at $37,000 (if you're not, you should), I estimate your 2018 income tax due as $38,643.00


• FICA tax will be about $15,000 (SS 6.2% up to $128,700 for each of you, then MCR 1.45% for all of it)


• $270,000 - $37,000 - $38,643 - $15,000 = That leaves your take-home pay right around $179,357/yr, or $15,000 per month, even assuming you're maxing pretax employer accounts.


• We'll assume you're making full backdoor Roth IRA contributions every year, too, so we'll take another $1,000/month off...and we'll assume you need to build an emergency fund, too, so another $1,000/month off...so we'll give you $13,000/month.

I can understand not wanting to spend 31% of your take-home income on student debt for that 5-year forecast, but you should definitely be able to hack 18% for the 10-year.  What about other debt?  Car loans?  Credit cards?  Most lenders want your debt-to-income ratio to be less than 43% when using *gross* income, which puts you back to your $270,000 figure...meaning the 5-year plan would only comprise 18%.  As for getting approved, you should be fine.

Now, how much *should* you spend?  I'd say about 1/4 to 1/3 of take-home income, which generally equates to a house priced around 2x your annual gross income or a payment of about 20% gross.  That puts you around a $500,000 house (monthly payment would be about $3,900 assuming $0 down, 4% interest, 2.5% property tax, 0.5% insurance...close enough).

I do want to impart the perspective that the median household income in the US is $59,000, or about $4,200/month take-home after taxes.  Even if you paid for the 5-year plan, you're still taking home over twice the median income in the US.

...so, I beg your pardon for giving you way more than you were probably looking for, and you may well have crunched all these numbers yourself, and if that's the case, then I'm sorry for the wall of text and numbers.  I just want you to recognize that your student loan scenario is far from ideal and that if you're going to make the best decision possible, you've got to have a full field of vision for all the factors involved...and I've only hit on a few today.