Student debt is a pretty hot topic these days and I see clients coming to me with anywhere from $84/month to $2600/month in loan payback amounts. It’s also a bit of a “hot potato” when it comes to engaged or newly married couples.
Here are the questions I get asked most, and my responses:
1. Should we rush to pay down our loans if we want to buy a house?
Answer: NOPE. When you go for a mortgage, the bank will look at whether you have enough CASH FLOW to take on whatever mortgage you’re looking at. The bank will not care about your overall debt amount as much as they care about whether you can service that debt. If you pay back larger chunks of your student loans each month, you have LESS cash flow for other debt servicing like paying a mortgage.
Unless you have loans over about 6% (that’s my “reasonableness” cut-off for interest rates, yours may differ), there’s no rush unless you come into a lot of money and can wipe them out. It may (you have to do the math to make sure this is right, which is why I say ‘may’) make sense instead to invest in a house and take longer to pay back your loans. Your family will live in the house you want, and you build equity.
2. Should we file our taxes married filing separate so my spouse does not have to count my income in his/her payback program?
Answer: this is tricky and requires a CPA to do the analysis, but my general rule of thumb is that it is RARE that a person is better off filing married-separately because the tax treatment is so severe. You lose some deductions and some are greatly reduced. Do not file like this WITHOUT asking a CPA to run the numbers and make sure it makes sense to do. If the spouse with the loans makes the MOST, it may not make sense to do this.
It requires further analysis by an expert, in the case a CPA. It’s not the knee-jerk best option even though some people sometimes think it is. It’s worth checking.
3. “I feel guilty having my wife/husband” pay back my loans with me, because they are my loans, but she/he makes more than I do and inevitably we are sharing the bills.”
Answer: this is my favorite question because I hear it so often. When your spouse married you, he/she knew about the loans. He/she also loves you for who you are and that includes whatever education you have that made you such great conversation, so witty and so cultured. It’s cannot be decoupled.
When you marry you marry totally. All expenses. In order to make the money you make, you probably needed your education. You cannot have one without the other. Your spouse should know this and be ready to throw your student loans into the general expense pot of the household along with the electric bill and iTunes. The loans were required for the household to earn the income it earns as a whole. Period.
If only the one who incurred them pays them, it skews the payment of the electric bill, mortgage and grocery bills. Obviously, the spouse that incurred them will have less money to participate in paying all the other bills. You are in this together and all earnings go to the household and ALL expenses are paid out of it (my article on why households should share accounts). The other spouse will end up paying more groceries if one pays all the loans. It’s a zero-sum game.
Student loans are only decoupled if there is a divorce, where loans go with the person who signed for them, especially if loans were signed prior to marriage. If the loans were incurred after marriage, the loans USUALLY go to the person who incurred them, but it could be up to the judge.
Before you email me, let me answer your question now: if you are on the Income Based Repayment plan (IBR), your repayment amount is based on the spouse who incurred the loans’ income, BUT you can both service the loans as a household expense on your regular month to month cash flow. One is not related to the other. You can still share accounts.
I know it’s frustrating and sometimes seems unbalanced, but think of the loans as part of the person you married. If you have to keep the 6 different camping tents, best friend who sometimes crashes on your couch and collection of [fill in the blank here], you have to keep the loans. It’s just another aspect of your spouse and your married the whole person.