Marriage legally binds you to your spouse — but that doesn’t mean saying “I do” to another set of student loans. Each of you remains responsible for loans you took out before your wedding. But marriage can affect your loan payments, loan-related tax breaks and ability to pursue other financial goals. Here’s how.
1. Your monthly payment could increase
Federal loan borrowers can enroll in one of four income-driven plans to lower their monthly payments. One, the Revised Pay As You Earn plan, determines married borrowers’ payments based on their combined adjusted gross income and loan debt, no matter how they file taxes. This usually means a higher monthly payment.
But married Pay As You Earn, Income-Based Repayment and Income-Contingent Repayment enrollees who choose the tax status “married filing separately” pay based on their individual incomes. Filing separately, though, means missing out on tax breaks joint filers receive.
“We run both scenarios just to see what the tax liability will be for both of them, and I have yet to find a situation that ‘married filing separately’ is better,” says Ara Oghoorian, a financial planner and owner of ACap Asset Management in Encino, Calif. Ask your tax preparer to check your tax bill for both options.
2. You could lose the student loan interest deduction
The student loan interest deduction lets you deduct up to $2,500 of student loan interest paid in the previous tax year from your taxable income. But if you and your spouse together earn more than $160,000, you’ll lose the deduction. You can’t claim it at all if you file separately.
3. Your spouse’s payments could affect your finances
If you co-sign your spouse’s private student loan, you’re legally responsible for repaying it if he or she can’t. The loan will also appear on both of your credit reports, where it could impact your ability to take on new credit or debt, such as a mortgage.
And if your spouse takes out a student loan during your marriage and then defaults, creditors in some states can go after both of your wages and assets — or, if you file jointly, your tax refund.
4. Your spouse may chip in on payments
If you and your partner decide to help each other repay your loans, consider creating a written agreement outlining the terms. It’s not an official document unless you have it drawn up by a lawyer, but it could help you avoid arguments in the future, especially in case of a divorce if one spouse depends on the other for financial help.
But remember: “The other spouse may agree to pay on the loans of his or her spouse, but the federal government doesn’t care about that because the loans remain only in the borrower’s name,” says Adam Minsky, a Boston-based lawyer specializibng in student loans.
5. You may be responsible for debt after divorce
Debt you bring into a marriage typically remains your own, but loans taken out while married can be subject to state property rules in divorce. And if one spouse co-signs the other’s private student loan, he or she is legally bound to the loan until obtaining a co-signer release from the lender.
To avoid post-divorce legal squabbles over student debt, couples can create a prenuptial or postnuptial agreement. But these agreements have limitations.
“Too often people think it will get them out of paying the debt and it’s not going to do that,” Minsky says. “But if the couple is concerned about a worst-case scenario and have agreed to do something in private that differs from the student loan agreement, then putting that in writing would be possibly really important down the line.”