Two words can change not only your relationship status but also your personal finances: “I do.”
That applies to student debt. Merging your finances can change your repayment strategy.
“I buckled down a few months after the wedding,” says Alexander Armstrong, who received his bachelor’s from Georgetown University in 2009 with around $30,000 in student debt. “My wife, who is much more financially savvy, pushed me to think seriously about tackling them faster – she didn’t want me to have that debt as we planned to eventually buy a home.”
The 30-year-old says he refinanced his student loans to a lower variable interest rate and that he’ll have his loans paid off just in time for the arrival of their first child later this year.
“When you get married, it’s essential to be transparent about all your finances – including your student loan debt – so you can develop a joint action plan for debt repayment,” says Zack Friedman, founder and CEO of Make Lemonade, a personal finance marketplace with comparison tools.
For some couples, getting married could adversely affect their income-based payment for federal student loans. On the flip side, a spouse with higher earning power and a good credit score can help secure a more favorable rate in refinancing the debt.
“It’s just in the couple’s best interest to go after the debt as a team,” says Robert Farrington, founder of the blog “The College Investor.”
Here are three things married couples should know when strategizing how to pay off student debt together.
1. Eligibility for certain repayment plans may change. If one spouse has federal student loans and is enrolled in an income-driven repayment plan, and the other isn’t, getting married can cause an uptick in monthly payments. In some cases, it may mean the borrower no longer qualifies for one of these plans. Income-based repayment plans offered by the government are capped at 10 to 15 percent of the borrower’s discretionary income.
For borrowers in Pay As You Earn, known as PAYE, or Income-Based Repayment, called IBR, married couples can file taxes separately, says Michael Lux, founder of the blog “The Student Loan Sherpa.”
But Lux says: “Couples that file separately pay a higher tax bill in April, but your spouse income won’t be counted when determining how much you can afford.”
For borrowers in the Revised Pay As You Earn Plan, or REPAYE, a spouse’s income is counted regardless of how the taxes are filed.
Experts say couples who are concerned about the implications to their student loan payments should use different student loan calculators. “My best advice there is go through student loan calculators and play around with different variables,” says Friedman from Make Lemonade.
2. Some lenders allow couples to refinance their student loans together. While most lenders don’t allow married couples to refinance their loans together, there are some financial institutions that offer a “couple loan.”
This loan combines the two incomes and takes the higher credit score, says Jack Zoeller, founder and CEO of District of Columbia-based Purefy, a financial tech company that offers this type of loan. “It unlocks savings that they can’t get in any other way.”
Zoeller says the couple loan allows one of the spouses to have no income at all. “This is perfect for a stay-at-home parent, or a spouse who just started a business. Of course, the other spouse has to have enough income to support their total combined debt.”
3. A spouse can be a co-signer for refinancing a student loan. Wealth advisors say that if one of the spouses has a good salary and credit score, refinancing student loans with that spouse as the co-signer is one option.
“It may significantly help reduce the cost of the loan,” said James Liotta, a financial advisor and president of Beverly Hills-based Prominence Capital. He says he’s seen the refinance rate drop as much a 3 percentage points with a co-signer.
While refinancing student loans is a popular way to lower interest rates, the co-signing spouse will be on the hook for that debt.
“If you co-sign on a student loan to help your spouse get a lower interest rate, you are legally responsible for that debt even if you later get divorced,” says Lux from The Student Loan Sherpa.