Student Loans, Taxes and the Future

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Student Loans, Taxes and the Future

Post by Biggles »

Good morning Bogleheads - I'm hoping I might get some direction and some help regarding my family's current situation.

I am headed to an accountant at some point this month, to try to figure out how the numbers will stack up and hopefully discover what the best course of action will be, but I wanted to see if anyone on the board has gone through a similar situation (for your sake, I dearly hope none of you have...) so if anyone has any ideas, tips, tricks, or have some good questions that I should pose towards the accountant -- any and all help and advice would be appreciated!

So the nuts and bolts of the situation:

DW has an ungodly amount of school loans:
Private: 100K
Federal (consolidated): 60k

We were married last year, so this year is our first year filing taxes together. As a federal employee, DW qualifies for the Public Service Loan Forgiveness (120 consecutive payments and the remaining balance is wiped out). With the PSLF program, if we file Married-Jointly this year, next year (as the PSLF program looks at your prior year tax return), her monthly payments will factor in MY income as well (using our total AGI for FY14).

We've got a call in to the PSLF program to determine the absolute maximum that the payments could be assuming we file Married-Jointly this year.

For reference, her current PSLF program payment the past year was ~$300 per month at ~53k AGI for herself. I'm not sure what the PSLF program payment would be next year if we file Married-Jointly this year - our Married-Jointly AGI would be 115k. I've looked into the PSLF program but I've yet to find if there is an absolute maximum payment (I seem to see 10% per year on various sites - though I don't know if that's loan balance or discretionary income - I've seen both, so I'm not sure which is correct, if either).

I know that Married-Separately is pretty much the absolute worst way to file - zero benefits (other than audit protection from the other spouse), no ability to have a ROTH IRA, no deduction for student loan interest paid, etc. etc. etc.

To make matters worse, I have a mortgage in my name, my own student loans (~12k, half of which is private), bills to pay, an oil tank to fill (repeatedly...), and other life items - after all bills are paid, we're sitting on a net positive of ~$1k per month.

So with all of that said - what does the Bogle word think the best course of action would be? What should I be asking my accountant? What should DW be asking the PSLF program? What am I missing by filing Separately? What am I gaining by filing Jointly? I've been trying to figure out rough numbers as to what the gain would be by filing Separately for the next 9 years versus filing Jointly for the next 9 years looking at all aspects (lower monthly payment-separately, versus higher monthly payment-jointly; no access to ROTH IRA-separately, versus access to ROTH IRA-jointly; loss of student loan interest deduction-separately, versus having access to the student loan interest deduction-jointly; loss of standard deduction OR itemized deduction-separately, versus having the standard/itemized deduction-jointly) to try to wrap my head around what life is going to look like for the next 9 years.

Any and all help and advice is appreciated - even if it is simply 'start digging your grave' :)

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Re: Student Loans, Taxes and the Future

Post by grabiner »

I would suggest working out the numbers each way. Tax software will figure your taxes as MFJ or MFS, and you can add the tax bill to the student loan payments to see whether the total cost is higher one way or the other.

As MFS, you can still use a Roth IRA through the backdoor if you don't already have a traditional IRA: contribute to a non-deductible IRA and immediately covert to a Roth. (And since your wife works for the government, the loss of the Roth isn't that great a cost anyway; she can contribute to the TSP, which has excellent investment options, and at your reported cash flow, you won't be maxing out your retirement savings.) You also don't lose deductions; you can either both take the standard deduction (and get half each), or both itemize. You do lose other tax benefits, so you might find that MFJ works better in some years in which those benefits are important.
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Re: Student Loans, Taxes and the Future

Post by Biggles »


Thanks so much for the advice - I will be running the numbers to see which way works best. I do appreciate you reminding me that as this is done each year, it can be changed each year as well - something that completely eluded my thinking heading into this.

DW did contact the PSLF coordinator today and discovered that our combined AGI puts her monthly payment at way too high to maintain, so our filing situation is pretty much cut and dry - separately to ensure her monthly payment stays low. But, needing to know all aspects, I'll still be running the taxes both ways and comparing the returns to the two monthly payments we've been shown (separately versus jointly)

Thanks again Grab, much appreciated!
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Re: Student Loans, Taxes and the Future

Post by chicken »

The amount you have to pay isn't determined by PSLF, that is just an enhanced forgivness as compared to IBR or PAYE.

You figure out what you pay by taking essentially your AGI really your MAGI but most don't have much that changes you AGI. You subtract 150% the federal poverty rate (17505 if single off the top of my head). Then you take that amount and you pay either 10% if you are on PAYE (pay as you earn) or 15% if you are on IBR (income based repayment).

She would choose IBR over PAYE only if she was forced to because her loans are older.

I bet you'll end up filing separate. You probably make too much to get the 2.5k student loan interest deduction.

There is never a "cap" on the amount she would have to pay beyond what the standard 10 year repayment plan would have been at the time she first consolidated with the government.
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Re: Student Loans, Taxes and the Future

Post by logos »

If you file married filing separately then her IBR (income based) payments will not increase. The question for your accountant is whether this benefit (lower payments leader to a larger balance at 10yrs that is forgiven under PSLF) is worth the loss of whatever tax benefits are associated with married filing jointly. Also make sure she qualifies for PSLF.
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Re: Student Loans, Taxes and the Future

Post by Xpe »

Also keep in mind ten years is a long time, plans change, interests change. Government programs change. My bridetobe is in the program, but were most likely paying off the debt asap - program is very clear that they make no guarantees about it existing ten years from now.
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Re: Student Loans, Taxes and the Future

Post by cmr79 »

My goal with PSLF has been to keep my payments as low as possible, but also to divert the money I would otherwise have been putting towards the loans into a taxable account. If PSLF works out, it'll be a great bonus for a down payment or whatever. If not, as long as the investments keep reasonably close pace with the interest, I haven't lost anything. Granted I could lose this money by keeping it in the market, but as there is no fixed timeframe for when I would use it, it seems like a risk worth taking.
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