Student Loans & Tax Filing Status

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For many, leaving college means starting to pay student loan debt which can often equal a house payment. Some student loan lenders offer an Income Based Repayment (IBR) or Pay as You Earn Repayment (PAYE) based on the adjusted gross income of your tax return.  If you are married and your spouse has a high income, this pushes your AGI up and probably doesn’t give you much benefit in lowering student loans.  One potential way around this is to file married filing separate (MFS) instead of married filing joint (MFJ).  I say potential as MFS generally means higher taxes are paid as a couple.

Here are some tax implications to keep in mind with the MFS filing status:

  • Dependent Care Credit not allowed
  • Earned Income Tax Credit not allowed
  • Student Loan interest deduction not allowed
  • Lifetime Learning Education Credit not allowed
  • Tax rates higher than MFJ

Another thing to keep in mind down the line is the taxability of future loan forgiveness with an IBR or PAYE.  As the tax law stands right now student loan debt forgiveness is considered taxable income (except under the Public Service Loan forgiveness program).  This means you could have a large tax bill in the year the debt is forgiven.

So the question is, should you file MFS and reduce your student loan payment?  It all comes down to the math running an MFS v MFJ tax return comparisons along with calculating loan repayment schedules based on the AGIs produced in both tax returns and seeing which one nets the most benefit while potentially looking at future taxability of any loan forgiveness.  Whoever said this was easy?  Online tax programs or a tax professional can help with these calculations.