Written By Travis Hornsby, CFA®, CFP®
As part of our series on introducing new members of the Student Loan Planner® team, I want to introduce Meagan McGuire. McGuire is our newest Student Loan Planner® Consultant as of November 2019, and she has a wealth of knowledge when it comes to student loan repayment loopholes.
She plays a big role in student loan consulting, and her knowledge and experience is a huge asset to our team. I recently sat down to talk about the ins and outs of federal student loans, and she shared some uncommon student loan repayment loopholes you might not know about.
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Let’s dive in.
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Who is Meagan McGuire?
McGuire is a self-proclaimed “finance nerd.” She has been involved in bookkeeping and finance since high school. Her interest in finance led her to graduate from college with a business degree.
“I figured out through an internship I really enjoyed personal financial planning,” said McGuire. “I thought there was a personal touch there versus doing business spreadsheets and profit-and-loss documents.”
As a financial planner, McGuire saw younger clients struggling with student loan debt.
So, in March 2017, McGuire opened her own business and took a deep dive into the student loan world and became a Certified Student Loan Professional™.
Student loan repayment loopholes and strategies
The world of student loans is complicated, and there are a lot of moving parts. I’m learning new things all the time, and it blows my mind because I do this all day, every day.
Therefore, with the in-depth knowledge McGuire has, I had to ask about student loan repayment loopholes and strategies that she’s seen.
Tax advantages of “married filing separately”
When you’re married, you file a joint tax return because “that’s just how it’s done,” right? But that may not be the best strategy if you’re married with student debt.
For example, if one spouse is on the Pay As You Earn (PAYE) plan and the other is on Revised Pay As You Earn (REPAYE), they end up paying less money filing separately than if they filed jointly. Keep in mind this strategy is more for people with federal loans, not private loans.
Filing separately can save a married couple money
The IRS “subtracts the poverty line from your household income to calculate your monthly payment,” said McGuire. When you have student loans and you file your taxes jointly, they “look at your household debt and your household income based off of both spouses.”
When you file separately, however, “that poverty line is subtracted from your household income technically twice.”
If you’re filing separately, your student loan payment is based on your own income. But you’re still married, so the IRS subtracts the poverty line for a two-member household. Then, your student loan servicer uses that information to calculate your minimum monthly payment.
The same thing goes for spouse number two. They file separately and their student loan payment is based on their own income alone. “That poverty line for a household size of two is deducted from spouse number two as well. So, you technically get two household-size deductions,” said McGuire.
Double consolidation for Parent PLUS borrowers
This student loan loophole is for parents who took out loans for their children’s education. It’s one that I just became aware of about a year ago. It’s very involved, but we’ll break it down.
“Parent PLUS loans are different than if a student borrowed for themselves,” said McGuire. “They do not have access to the same repayment options, even though [these are] federal loans.”
So, if you’re in your 50s, 60s or 70s and feeling crushed from a lack of affordable income-driven options for paying back Parent PLUS loans, consolidation might help.
Increase flexibility with income-driven repayment plans
Consolidating your Parent PLUS loans will turn them into a Direct Consolidation loan. When you do this initial consolidation, you “have access to one income-driven plan — what’s called income-contingent repayment — that’s based on 20% of discretionary income,” said McGuire.
The income-contingent repayment plan is one of the oldest income-driven options and doesn’t provide much relief to student loan borrowers with federal student aid.
“There is a legal loophole in the system to where, if you implement this process — and it is a process — you can open the door to have access to those lower income-driven repayment options,” said McGuire. These can lower your monthly payments to make your student debt more manageable.
This lesser-known “double consolidation” strategy has you doing two separate student loan consolidation processes. In the end, you can get significantly lower payments because the loans become eligible for REPAYE, Income-Based Repayment (IBR) and PAYE plans.
“But the process has to be done correctly,” said McGuire. And that can get tricky. You can read more about the Parent PLUS double consolidation loophole or schedule a consultation and work with McGuire directly on how to do that.
What to do if you’re in a community property state
Living in a community property state makes a huge difference in your student loan repayment strategy.
“Community property states, when filing separately, split income down the middle versus keeping income directly proportionate to what you actually made in that year,” said McGuire.
Roughly 30% of the American population lives in community property states. Community property states include:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
For all other states, if you earn $50,000 and your spouse earns $100,000, your loan payments are based on your $50,000 income. But community property states add the income of both spouses together and divide it equally.
When that happens, “your payment would then be based on the $75,000,” said McGuire. “It can either hurt you or help you, but there are ways you can combat how it would hurt you by filing separate alternative documentation for income versus a tax return.”
This little-known loophole could drop your monthly student loan payment by up to $1,000 or more. I’d say that everyone living in a community property state needs a student loan plan to make sure they’re using the best repayment strategy to fit their income and tax situation.
How to consult Meagan McGuire
McGuire clearly has an enormous amount of knowledge about the student loan repayment process.
As a Certified Student Loan Professional™, and with her experience in personal financial planning, McGuire can help you maximize your student loan strategy to get the most benefit from common and uncommon financial strategies. This might include leveraging student loan forgiveness programs (e.g. Public Service Loan Forgiveness, or PSLF), refinancing private student loans or using any number of student loan repayment loopholes. She can also help you understand interest rates, how student loan interest works and which private lenders are best for your situation.
She specializes in helping people who have student loan balances of $200,000 or less and takes appointments on Mondays and Fridays. “So, if you schedule a time on Monday or Friday, you will wind up on my calendar,” she said.
You can also check out our other Student Loan Planner® consultants to find the right person for your situation.
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