Buzz
Have you noticed that millennials are postponing marriage? While some argue that smartphones and video games are the culprits, I would argue that the reality is likely tied to the heavy burden of student loan debt and the low wages that many in Generation Y are facing. Why would anyone want to spend on a wedding when they can barely make their student loan payments each month?
However, if you do decide to tie the knot, it’s crucial to think about how both yours and/or your spouse’s student loans might impact each other. Consider this question from Kathryn:
If you're enrolled in an income-driven repayment plan for loan forgiveness, does your spouse's income count as part of your own if you get married?
Here's what you need to know.
Taxes
To answer your question, Kathryn, the short answer is yes. If either you or your spouse has student loans and you're enrolled in the Revised Pay As You Earn plan, your monthly payment will increase. This is because the payment amount is calculated based on your combined adjusted gross income.
For the other three income-driven repayment options, you can avoid this increase by filing your taxes separately. However, doing so means you’ll miss out on the tax benefits that come with filing jointly. It’s best to consult with your tax advisor to see what works best for your specific situation, but it’s often better to file jointly and accept the higher monthly payment.
This situation is affecting when and whether people choose to marry, according to Travis Hornsby, founder of Student Loan Planner. “Many people are getting spiritually married but not legally married because of this,” he says. “Couples are having ceremonies but aren’t submitting their marriage certificates for tax reasons.”
Moreover, you might lose out on the student loan interest deduction, which lets borrowers deduct up to $2,500 in interest payments from their taxable income. However, you won’t be eligible for this deduction if you and your spouse have a combined income over $160,000, and you also lose eligibility if you file separately.
Other Considerations
There are numerous other financial aspects to consider when you have loans and get married.
“Anyone who is getting married today should have a discussion about finances and loans, and this conversation should happen before the engagement,” advises Hornsby. “Be upfront about how much debt you have and your strategy for paying it off.”
For instance, consider credit. Your spouse’s loans won’t impact your credit unless you’re a co-signer. However, as NerdWallet points out, “if your spouse takes out a student loan during your marriage and defaults, creditors in some states can seize both of your wages and assets—or, if you file jointly, your tax refund.”
If you’re looking to buy a house, the most important factors to consider are your debt-to-income ratio, down payment, salary, credit history, and assets. According to Mike Brown, managing director of Comet, the DTI is the most significant factor. If your only debt is student loans and you earn a decent income, you should be fine. But if one of you has a significant amount of debt, the spouse with the lesser debt should apply for the mortgage, says Brown.
A helpful guideline for managing your mortgage: “Your house should cost no more than twice your combined income if you have debt,” advises Hornsby. “You don’t want to be overwhelmed with debt.”
Divorce
If you get divorced, things can get complicated. You might need to share the responsibility for the debt with your spouse, no matter whose it originally was, depending on when the debt was incurred, explains Kathleen Campbell, a Registered Investment Advisor from Fort Meyers, Florida.
If the debt was acquired before the marriage, it's your responsibility to pay it off (and the same applies to your spouse). “Even if a couple was together for years before marrying, with the expectation that spouse A’s income would cover spouse B’s loan payments, if spouse B took on the loans before marriage, they remain spouse B’s responsibility forever,” says Campbell.
However, if the debt was acquired after the marriage, things “become more complex.” “It turns into a legal matter, depending on state laws, how the money was used, both parties’ earning abilities, how long the degree was utilized during the marriage, and other factors,” she says. “It’s a case-by-case scenario if the debt was incurred after marriage but remains in just one spouse’s name.”
As a co-signer, you’re likely responsible unless your spouse refinances. “The co-signed agreement is a contract between the signer and the lender, not between spouses, so it’s a binding contract,” says Campbell. “It is possible to refinance the loan in just one spouse’s name, provided that spouse has the necessary income and credit history to convince the lender to approve the refinance. This could be part of divorce settlement negotiations.”
If you're really concerned, consider drafting a prenup that outlines how the debt will be handled. That way, you’ll have one less thing to stress about.
