Student Debt

Student Loans and Marriage – A Dangerous Mix!

Engagements are such a joyous time! The romance, the ring, the excitement of telling friends and family and Facebook!  Far be it from me to cast a shadow on the whole joyous event, but someone here needs to be the realist. One of the first things you need to consider before saying “Will you…” or “Yes” is the potential catastrophic effect on your student loan payments. Unless you were fortunate enough to have had substantial scholarships or family assistance you will likely find yourself in one of the “income-driven plans.” If you are like many DVMs, you might just be in REPAYE. Depending on who you marry, this could be a very, very big problem.

REPAYE and veterinarians 

We covered student loan repayments before (here and here) so we won’t rehash the whole topic. If REPAYE is your income based repayment plan, monthly payments are capped at 10% of discretionary income; however there is no maximum payment.  Discretionary income is everything you earn above 150% of the poverty level. In 2018 “poverty level” for a single person living in the contiguous United States is $12,140 a year. So if you earn $70,000 a year, your annual discretionary income would be $51,790 ($70,000 –(1.50* $12,140)) or ~ $4,250 a month. Thus your monthly payment would never be more than ~ $430 a month.

Here is the real magic of the REPAYE: If your monthly payment doesn’t cover the interest that accrues on your loan, the government will cover: 100% of the unpaid interest on subsidized loans for the first three years and 50% of the accruing interest for the rest of the loan. In addition, the plan will pay 50% of the interest on all unsubsidized loans for the life of the loan. So using our hypothetical $70,000 income from above and assuming $300,000 in unsubsidized loans at 6.25%, in the first year interest would be about $18,750 but we paid only about $5,160. The government will pay 50% of the unpaid interest while the rest accumulates – but does not accrue – and here is where the trouble begins.  

Weddings and REPAYE – a dangerous mix!

Let’s take Sally – she graduated 8 years ago with $300,000 of unsubsidized loans at 6.25%. Sally makes $100,000 a year and enrolled in REPAYE. . Her monthly payments are $681 a month ($8,172 / year); however, The interest on her loans is $18,750 a year. Therefore, there is $10,578 of unpaid interest a year. The government pays 50%. of the unpaid interest leaving $5,289. At the end of 5 years there is ~$26,445 of unpaid interest. As long as sally stays in REPAYE the unpaid interest just accumulates. If Sally fails to re-certify or leaves the program voluntarily, the $26,445 becomes capitalized (added to loan balance). Interest will be charged on $326,445. The longer Sally has been working, the more her loan balance will increase should she leave REPAYE.

REPAYE – the hidden danger!

Sally’s significant other proposes and she said “Yes.” (gosh that was painful to type) Her significant other is in finance and earns $100,000 and has no student loans. If Sally gets married, her monthly payment increases to $1,400; however, if she was in PAYE her monthly payment would only be only $622 a month. Why the difference? Because in REPAYE you MUST include your spouse’s income and student loans in calculations while PAYE give you the option of including only yourself by filing taxes “married filing separately.” There are some tax disadvantages to “married filing separately” – but not $780 a month of a disadvantage. The more she and her significant other earn, the worse REPAYE gets. There is no limit to the monthly payment and at some point they could end up paying MORE than under a standard repayment plan. 

Switching from REPAYE to PAYE

What can Sally do? Well, she can leave REPAYE and drop into PAYE. The first issue is the accumulated interest. It will become added to the balance of the loan! This won’t increase her monthly payment; however, it will increase loan forgiveness as the 6.25% will now be compounding on $326,445 .

A second consideration is that Sally will lose the benefit of having 50% of her interest paid by the government. This benefit is unique to REPAYE. The result can be an increase in the balance at the end of the loan. Since loan forgiveness is treated as income, there will be more federal tax to pay. Also, since PAYE has a shorter repayment timeframe – there will be less time to save. Lastly, if she doesn’t file taxes in the first year of marriage as “married filing separately” Sally may no longer qualify for PAYE as the combined  income may be too high. So planning is essential. 

The solution?

What should Sally do? Well first she should read up and understand the various student loan repayment plans. Then she should spend some time on the VIN student loan repayment simulator  and see what works best for her and her significant other. Lastly, she should speak to a financial advisor who specializes in student loans. There isn’t “one plan fits all” solution to this problem and timing is essential so planning ahead is essential.