Student loan borrowers face steeper 'marriage penalty' under new repayment plan

Married student loan holders — and those soon tying the knot — face important tax and financial decisions, especially after recent changes to the federal lending system. The U.S. Department of Education's new Repayment Assistance Plan, or RAP, increases the "marriage penalty" for borrowers, said Douglas Boneparth, a certified financial planner and the president of Bone Fide Wealth in New York. A marriage penalty typically occurs when a married couple pays more in income taxes by filing jointly than they would if each person filed as single. When it comes to student loans, this happens when combining both spouses' incomes results in a higher monthly student loan bill under an Income-Driven Repayment plan, or IDR. "Marriage can change their monthly payment immediately and dramatically, even if their own income hasn't changed at all," said Boneparth, a member of CNBC's Financial Advisor Council. Over 42 million Americans hold student loans, and the outstanding debt exceeds $1.6 trillion, according to the Congressional Research Service. About half of those borrowers are married, according to a rough estimate from higher-education expert Mark Kantrowitz. Here's what couples with education loans should consider. Filing jointly could trigger a higher loan bill The biggest decision married couples with student debt need to make is whether to file their taxes jointly or separately, said Nancy Nierman, assistant director of the Education Debt Consumer Assistance Program in New York, a nonprofit that helps borrowers navigate repayment. While "married filing jointly" involves a single return, "married filing separately" means you and your spouse have your own filings with individual income, credits and deductions. The tax code generally favors joint filers. Experts say there are situations where filing separately can make sense, but it's important to work with a tax professional to gauge the overall impact. The disadvantage to filing jointly is that, if you're repaying your student debt on an IDR, you could get hit with a significantly larger monthly bill, Nierman said. That's because the Education Department calculates your IDR payment based on a share of your income, and when you file taxes together, you and your spouse's earnings are combined. Nierman provided an example: A wife owes $110,000 in student debt and earns $50,000 a year, while the husband doesn't have student loans and makes $70,000. Their combined annual income is $120,000. On the Income-Based Repayment plan, or IBR, if the couple filed their taxes jointly, the wife's monthly student loan bill would be $730. Filing separately would give her a monthly payment of just $146. Those savings could be especially meaningful for borrowers pursuing Public Service Loan Forgiveness, Boneparth said. PSLF, which President George W. Bush signed into law in 2007, allows certain not-for-profit and government employees to have their federal student loans canceled after a decade. "Every dollar you reduce your payment by is a dollar more that gets wiped clean at the end of 10 years," he said. Marriage can change their monthly payment immediately and dramatically.Douglas BoneparthCFP The difference is less stark when both spouses hold student loans, Nierman said. In that same example above, if the husband owed $75,000 in student debt, their combined monthly student loan payment is $730 if they file taxes together, with the wife's bill being $434 and the husband's $296. If they file separately, their combined payment is $459, with the wife's bill being $146 and the husband's $313. The annual student loan payments savings from filing taxes separately fall to around $3,300 in the second example, down from roughly $7,000 in the first. "They save a lot less when they both have student loan debt because they both shoulder the responsibility for making a payment based on combined income," Nierman said. For those who got married this year, monthly loan payments won't change until after they file their next tax return. If you're repaying your debt on the Standard Repayment Plan or the new Tiered Standard Repayment Plan, you'll have the same monthly payment amount regardless of your tax filing status. That's because the payments on those plans are not tied to your income; they're fixed and spread over a certain time period. How new RAP plan worsens the 'marriage penalty' The "marriage penalty" for student loan borrowers who file jointly will likely be "steeper" under the Education Department's new RAP plan, said Boneparth. RAP became available as of July 1, due to President Donald Trump's "big beautiful bill" passed last year. That's because RAP, unlike the Education Department's other IDR plans, doesn't shield a portion of a borrower's income for basic living costs. Instead, your bill is based on your adjusted gross income, or AGI, which is your total earnings before taxes, minus certain deductions like 401(k) retirement plan contributions. Other IDR plans typically charge a flat percentage of a borrower's income. However, under RAP, monthly payments will typically range from 1% to 10% of your earnings — the more you make, the larger your required payment. As a result, RAP borrowers who file jointly will also likely see a bigger increase to their payment, Kantrowitz said. "Each $10,000 increment of income pushes you into a higher percentage of AGI" when calculating payments, Kantrowitz said. For example, if a borrower earns under $30,000 a year, their monthly RAP payment is based on 2% of their AGI, which comes to $50 a month, Kantrowitz said. But if that borrower files a joint return with their spouse, who earns $45,000 a year, they're pushed up to the 7% share of AGI under RAP and left with a bill of roughly $437.50. One other note: The RAP plan also offers a $50 discount on your monthly bill per dependent, which most often is a child but can also include parents and others in certain cases. Spouses who file their taxes separately are not each able to claim the same dependent, said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for federal student loan servicers. "There's no double dipping if you are married and file separately," Buchanan said. Filing separately may mean bigger tax liability Married couples need to consider factors beyond their monthly student loan bill when deciding how to file their taxes, said CFP and certified student loan professional Landon Warmund at Reliant Financial Services in Kansas City, Missouri. Compare the potential savings in loan payments against the financial losses of filing separately, said Warmund, a member of the CNBC Financial Advisor Council. To decide which way to go — separate versus joint — they need to run the math both ways.Mark Kantrowitzhigher education expert Filing jointly provides numerous benefits: You can usually claim more tax deductions and credits and potentially contribute more to certain retirement accounts, Warmund said. For example, married borrowers who file separately are ineligible for the tax break that allows you to deduct up to $2,500 a year in student loan interest payments. Filing your taxes separately can also be more expensive, and your audit risk can be higher "simply because you're filing two returns," Warmund said. "Have a tax professional run the numbers to see the tax cost side," Warmund said. "Run the numbers on the student loan side and compare the two to help you make a determination." What else to know Now is an especially good time for married borrowers to sign up for automatic payments, Boneparth said. The Trump administration is offering borrowers who do so a 1-percentage-point discount on their interest rate through June 30, 2028. But they have to sign up by the end of September to access the benefit. "Both spouses should enroll if they have separate loans," he said. Lastly, married couples should also know they can't combine their debt into one loan through consolidation anymore. While doing so may have made repayment simpler for some couples, it also caused a lot of headaches for those who divorced. A law passed in 2022 allows married couples to separate their loans again.