Question on PAYE student loan repayment options

[ec236]

My wife is a 1st year resident and for 2016, I filed our taxes jointly (she was a student so it made sense...).

We want to do a PAYE repayment option but because of our 2017 filing status and my income, we are stuck paying $1000+ / month.  So for 2017 tax return, we plan to file separately.

Question is: do my wife need to have her own separate bank account in order for us to do this and for her monthly payments be adjusted?

[DMFA]

ec236 wrote:

My wife is a 1st year resident and for 2016, I filed our taxes jointly (she was a student so it made sense…).

We want to do a PAYE repayment option but because of our 2017 filing status and my income, we are stuck paying $1000+ / month.  So for 2017 tax return, we plan to file separately.

Question is: do my wife need to have her own separate bank account in order for us to do this and for her monthly payments be adjusted?

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Nope, no separate bank accounts needed.  You'll need 2017 tax returns to recertify your income, though.  If you can knock them out real fast (at least get a form 1040 done), that should suffice to include with the income recertification form.

Problem with this is that your higher income will be taxed at a higher bracket and you won't be eligible for several credits and deductions, and if you've already made Roth IRA contributions, you'll need to recharacterize them to Traditional and do backdoor Roth.

Make sure that the extra taxes are worth it the lower loan payments, and realize that every dollar of interest you don't pay is just kicking the can down the road (which might still be the least bad choice).

[ec236]

@DMFA Thank you so much!  This is very helpful.  Yes we will probably lose out a little bit on the overall return by filing separately, but it will provide some much needed relief in-year and hopefully be better for us as we pursue PSLF.

Thanks again!

[DMFA]

ec236 wrote:

@dmfa Thank you so much!  This is very helpful.  Yes we will probably lose out a little bit on the overall return by filing separately, but it will provide some much needed relief in-year and hopefully be better for us as we pursue PSLF.

Thanks again!

Click to expand...

In that instance re: PSLF, the MFS/PAYE/PSLF stack is generally the best way to go until her income gets higher, such as if the calculated payment goes above the 10-year standard amount at which PAYE is limited, and then you'd just file jointly but continue doing PAYE.  Yes, the point of PSLF is to pay as little over the life of the loan as possible.

Caveats here are that you need to to Backdoor Roth IRA instead of direct Roth contributions, which is no big deal, and that you'll pay a bit more in taxes, which you already know.  The biggest one, however, is a contingency plan should PSLF no longer allow for full tax-free forgiveness, in which case you would do well to build up a "just-in-case fund" in a taxable brokerage account to pay the loan should your plans be threatened by the government.

[maebo]

@dmfa I have been reading through countless posts on this website the past week, and am always blown away with the clarity of your advice.  I am in a bit of a different situation from ec236, but was wondering if you might be able to shed some light for me...

- I currently have just over 200K in student loans and have been under the PAYE plan working towards PFSL.  I have about 3.5 years of qualified monthly payments (and have been submitting EC forms twice a year).  I remain committed to the PSLF path (despite the unknowns...) but have been setting aside funds in case this falls through.

- Throughout residency, my AGI was ~40K and my husband's AGI was ~70K we went with the PAYE and MFS plan to keep monthly loan payments lower.  This made the most financial sense to us after crunching numbers.

- I am currently completing a chief residency year with an AGI of ~80K.  I will start a new job this summer (and will continue to qualify for PSLF under new employer) with an estimated AGI ~170K, and my husband's AGI will remain the same.  I have been trying to crunch numbers to determine the best plan (continuing PAYE + MFS vs switching over to REPAYE + MFJ), but am getting lost in the calculations.

 

Any advice??

 

Thank you so much!

[ec236]

@DMFA

Agree with maebo above.  Another question for you or for anyone...  So now that we've filed separately, my wife is trying to get an adjustment based on just her AGI (of which last year was like $20K).  But it's also asking for spouse's AGI.  Will this impact the repayment amount?

Cause if so... filing separately seems pointless?

[cgossage]

ec236 wrote:

@dmfa

Agree with maebo above.  Another question for you or for anyone…  So now that we’ve filed separately, my wife is trying to get an adjustment based on just her AGI (of which last year was like $20K).  But it’s also asking for spouse’s AGI.  Will this impact the repayment amount?

Cause if so… filing separately seems pointless?

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Is your wife filing using the "Income-Based (IBR) / Pay As You Earn / Income-Contingent (ICR) Repayment Plan Request form?"  If so, the form only asks for your wife's income if filing jointly.  If you are using PAYE, you don't have to list your spouse's income on any of the paperwork since you are filing separately.

[ec236]

@cgossage - so if whatever form she is filling out does ask for my income, that means it's not the right form?  she wants to do PAYE... but it seems to be asking for my AGI

[cgossage]

maebo wrote:

@dmfa I have been reading through countless posts on this website the past week, and am always blown away with the clarity of your advice.  I am in a bit of a different situation from ec236, but was wondering if you might be able to shed some light for me…

– I currently have just over 200K in student loans and have been under the PAYE plan working towards PFSL.  I have about 3.5 years of qualified monthly payments (and have been submitting EC forms twice a year).  I remain committed to the PSLF path (despite the unknowns…) but have been setting aside funds in case this falls through.

– Throughout residency, my AGI was ~40K and my husband’s AGI was ~70K we went with the PAYE and MFS plan to keep monthly loan payments lower.  This made the most financial sense to us after crunching numbers.

– I am currently completing a chief residency year with an AGI of ~80K.  I will start a new job this summer (and will continue to qualify for PSLF under new employer) with an estimated AGI ~170K, and my husband’s AGI will remain the same.  I have been trying to crunch numbers to determine the best plan (continuing PAYE + MFS vs switching over to REPAYE + MFJ), but am getting lost in the calculations.

 

Any advice??

 

Thank you so much!

Click to expand...

Not DFMA but I'll try my best to sub in for him.

While you are committed to PSLF, using PAYE and filing MFS will probably still be your best bet. Under PAYE, your payment will be ~$1,265/mo once you have recertified your income at $170,000 and you are MFS.  Under REPAYE or PAYE (MFJ) your payment will be ~$1,800/mo.  You will get the interest subsidy under REPAYE, but that is largely irrelevant while PSLF is still on the table.

I estimated your taxes using the standard deduction and assuming both you and your husband will be maxing out your 401(k) contributions.  Using this estimate you would pay ~$1,300/year more in taxes if you file MFS.  That's a relatively small price to pay for saving $535/mo off of your monthly payment.

This to say, based on the information you have provided, you are on the right track.