IDR Plans that allow for married filing separately?

[Anton123456]

I'm a married fourth year medical student with a question about tax filing status impacting the income-driven repayment plans.

My spouse makes ~$40,000, and doesn't carry any student loans.  We have been filing jointly to take advantage of the tax breaks during medical school, and are planning to do so for 2017 as well.  Unfortunately, I will graduate with about $400,000 student loan debt at around 6.5% (all direct federal, no private loans).  I will be in training for ~6 years total, and am entering a moderately high-paying specialty.

Because of my high debt load, long training period, and my spouse's relatively modest salary, we will be looking to do some form of IDR and seek PSLF rather than refinancing and trying to pay off the debts quickly.

(1) If we file jointly for 2017, will I have to include my spouse's income in the IDR calculations assuming I enroll in an IDR plan in 2018?  Would we then be able to file separately in 2018 and have her income excluded?

(2)  I know it is generally it is advantageous to file jointly for married couples because you're subject to a lower effective tax rate.  However, with this much debt and a low tax burden overall, it seems like filing separately would be advantageous in my case.  Using a couple calculators and some rough numbers, it seems like PAYE is the lowest monthly payment and would go from $589 if filing jointly, to $308 if filing separately.  Further, filing our taxes separately would only increase our tax burden by about $300 ($300 cost for $3,372 savings yearly).  Am I missing something big here?

[DMFA]

The way that will limit the amount paid over the life of the loan until forgiveness is the MFS/PAYE/PSLF stack.

The biggest problem is if there are disparate incomes, the higher is taxed at a higher marginal rate, and you're not eligible for several credits and deductions. Also, both have to take deductions the same way (either both itemize or both take standard). This usually results in a slightly higher tax bill. The other downside is if you don't end up doing PSLF, you're on the hook for everything you didn't pay which has been accruing 6.8% interest (or whatever your ridiculous rate is).

At your long training term and high debt, then PSLF definitely should be a strong consideration. It's not airtight, though. Do you have a backup plan if Betsy DeVos screws you (though unlikely to affect current enrollees)? Your RePAYE payments would be $333 higher with an additional $40,000 of income. If you think you might not end up wanting to be employed full-time by a nonprofit, and you want to prevent thousands in unpaid interest from accruing, that can be a good hedge.

I can't tell you what to do, but what people tend to do in your scenario in the MFS/PAYE/PSLF stack with a "side fund" built up in case they take PSLF away or limit it...but you wouldn't build that up until you finish training.

[Anton123456]

DMFA wrote:

Do you have a backup plan if Betsy DeVos screws you (though unlikely to affect current enrollees)?

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It's depressing how likely this is looking for me... the most recent information I have is that June 2018 is the last month that new people will be allowed into the program (conveniently, one month before I start working at a qualifying non-profit!!!)

The backup plan would be something along the lines of what you noted... Try to pay at least some of the interest accruing during residency, and obviously at that point I'd file taxes jointly with my spouse.  Would also look into refi if there are private student loan refinancing agencies who allow for deferments or interest-only payments during residency

Thanks for the response, looks like I'll plan on PAYE for now (until the official word that I'm getting screwed comes down).

[cgossage]

How I understand it, is new borrowers won't be eligible for PSLF, not that you have to have begun working at a qualified non-profit by the time the new bill goes into place.  Granted, that can always change, but I would hold out a little hope for now.

[DMFA]

Anton123456 wrote:

DMFA wrote:

Do you have a backup plan if Betsy DeVos screws you (though unlikely to affect current enrollees)?

Click to expand…

It’s depressing how likely this is looking for me… the most recent information I have is that June 2018 is the last month that new people will be allowed into the program (conveniently, one month before I start working at a qualifying non-profit!!!)

The backup plan would be something along the lines of what you noted… Try to pay at least some of the interest accruing during residency, and obviously at that point I’d file taxes jointly with my spouse.  Would also look into refi if there are private student loan refinancing agencies who allow for deferments or interest-only payments during residency

Thanks for the response, looks like I’ll plan on PAYE for now (until the official word that I’m getting screwed comes down).

Click to expand...

The most important thing is that you're utilizing a reasonable thought process, layering contingency plans, and going forward with your eyes open, so whatever the government decides re: PSLF, you're going to do fine.  Focus on getting through residency and minimizing your mistakes, and take a few minutes a week to think about this loan plan, and you'll get to where you need to get.

[Anton123456]

Thanks for the input everyone, much appreciated.

With respect to the recent/upcoming changes, I think there are a couple differences in the wording, but I'm not sure which wording ended up passing (either way, my understanding is that there will be further changes in the senate bill and reconciliation process).  Changes to the program would be to abolish PAYE/RePAYE/IBR, and offer only two payment plans: some form of IDR, and a 10-year plan.  It would also abolish PSLF for anyone who isn't enrolled in a qualifying PSLF program (PAYE/RePAYE/IBR).

- One wording said the changes would impact loans originated after June 2018 (which would likely be easier for the government to implement since my MPNs all say IBR/PAYE/RePAYE/PSLF are options).

- The other wording says that anyone not already in one of the qualifying repayment plans (IBR/PAYE/RePAYE) by June 2018 would not be eligible for PSLF

 

Edit: so in summary, yes, holding out some hope...

[Anton123456]

Just wanted to update you all since my thinking has evolved on this a bit, and I wanted you guys to take a look at my logic.

With the scenario outlined above (except debt of $410k and loans at a ridiculous 7.2%), if I make the minimum payments using the PAYE/MFS track, my debt will balloon to almost $650,000 by the end of my 6 year training!!!!!  However, if I do the MFJ/REPAYE, my debt will only be around $460,000 at the end of training due to the govt subsidy on unpaid interest.  However, I would end up paying about $20,000 more over the 6 years of training.  So, $20,000 to prevent $190,000 of interest from accruing.

Now, if I do end up pursuing PSLF (and it remains unchanged from its current form), that $20,000 over 6 years would be somewhat "wasted".  However, if there are substantial changes to the PSLF program (e.g., instituting a cap, only forgiving a percentage, phasing out above a certain income, etc), then it will have prevented a whole lot of interest from accruing.  Likewise if I go the private practice route and don't work for a qualifying employer, etc.

Also, I think there's a significant psychological benefit to keeping my debt under $500k.  With my specialty, that should keep debt:income well under 2:1 and should be a manageable number even if I go into private practice and just refinance it rather than do PSLF.

I'm not worried about being able to live comfortably on the increased REPAYE payments during residency, so I'm definitely leaning towards that right now...  Also, if I do end up pursuing PSLF, I understand that one downside is that there is no cap on REPAYE payments (10% of disposable income without the option of going to standard repayment plan), but with my debt load I don't think those payments will hit the 10-year repayment at any point during the loan payback anyway, so I don't see that as a big barrier.

Let me know what you think!

[cgossage]

Anton123456 wrote:

Just wanted to update you all since my thinking has evolved on this a bit, and I wanted you guys to take a look at my logic.

With the scenario outlined above (except debt of $410k and loans at a ridiculous 7.2%), if I make the minimum payments using the PAYE/MFS track, my debt will balloon to almost $650,000 by the end of my 6 year training!!!!!  However, if I do the MFJ/REPAYE, my debt will only be around $460,000 at the end of training due to the govt subsidy on unpaid interest.  However, I would end up paying about $20,000 more over the 6 years of training.  So, $20,000 to prevent $190,000 of interest from accruing.

Now, if I do end up pursuing PSLF (and it remains unchanged from its current form), that $20,000 over 6 years would be somewhat “wasted”.  However, if there are substantial changes to the PSLF program (e.g., instituting a cap, only forgiving a percentage, phasing out above a certain income, etc), then it will have prevented a whole lot of interest from accruing.  Likewise if I go the private practice route and don’t work for a qualifying employer, etc.

Also, I think there’s a significant psychological benefit to keeping my debt under $500k.  With my specialty, that should keep debt:income well under 2:1 and should be a manageable number even if I go into private practice and just refinance it rather than do PSLF.

I’m not worried about being able to live comfortably on the increased REPAYE payments during residency, so I’m definitely leaning towards that right now…  Also, if I do end up pursuing PSLF, I understand that one downside is that there is no cap on REPAYE payments (10% of disposable income without the option of going to standard repayment plan), but with my debt load I don’t think those payments will hit the 10-year repayment at any point during the loan payback anyway, so I don’t see that as a big barrier.

Let me know what you think!

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I think that is a sound plan and a way to hedge your bets and give you some protection should PSLF not work out for whatever the reason (ineligible employer, politics, etc).  You will also save yourself a decent amount of taxes over those 6 years as well that will help offset the additional $20,000 of payments you will be making.