Double Debt Strategy for Married Borrowers: When to File Separately

Is it better to file jointly or separately for student loans as a married borrower? It’s a simple question with a more complex answer.

When filing taxes separately, the U.S. Department of Education doesn’t allow you to double-count children or your spouse when determining your family size for your income-driven repayment (IDR) calculation. 

At first glance, it might seem like a married couple who both have federal student debt should file their income tax return jointly. However, under the new SAVE plan, the math might still work in your favor when filing separately.

How SAVE plan rules help married student loan borrowers

Under other income-driven repayment plans, such as PAYE and IBR, there was generally very little benefit to filing taxes separately when both spouses had student loan debt. In most cases, couples would end up paying more in taxes compared to their potential student loan savings. But the SAVE plan allows for more borrowers to benefit from the married filing separately (MFS) strategy.

The primary reason the new SAVE plan rules could set you up to save more money overall is that the poverty line deduction jumps from 150% to 225%.

The Department of Education uses discretionary income to calculate your IDR monthly payment amount. Under the SAVE plan, this is determined by subtracting 225% of the federal poverty line (FPL) based on your family size from your adjusted gross income (AGI).

Therefore, the poverty line deduction protects part of your income from being included in the IDR plan calculation. Here’s how much income you can earn before having to pay on the SAVE plan based on 2024 federal poverty line guidelines.

Family size	Protected income
1	$33,885
2	$45,990
3	$58,095
4	$70,200
5	$82,305

Because of the SAVE plan’s generous rules, filing taxes separately gives you the opportunity to protect a larger amount of your income from being included in your IDR payment. Here’s how.

Example calculation: Is it better to file jointly or separately for student loans when you both have federal debt?

Pretend you’re married and both of you earn $50,000 and each have a modest amount of federal student loan debt. You don’t have any children at this time.

If you file taxes jointly, you’ll receive a poverty line deduction of about $45,990 under the SAVE plan. However, if you file taxes separately (providing each spouse with a family size of one), your poverty line deduction will be around $33,885. But you’ll each receive that $33,885 FPL deduction, thereby, shielding a total of $67,770 of income from your IDR calculations. That’s $21,780 of additional protected income simply by filing separately versus jointly.

What does that actually mean in terms of student loan savings?

Well, under the SAVE plan, monthly student loan payments are calculated based on 10% of discretionary income for graduate borrowers. Beginning in July 2024, undergraduate borrowers will only have to pay 5% of discretionary income. If you have a mix of graduate and undergraduate, you’ll pay a weighted average between 5% to 10% based on the original loan balances you took out.

Using our previous example, a graduate borrower enrolled in SAVE would keep 10% of that approximately $22,000 as savings — meaning you could receive about $2,200 in student loan savings per year by filing separately.

And the overall math holds up if you throw kids into the mix. Just know that if you file taxes separately, only one spouse gets to claim the children for family size purposes.

When filing separately makes sense if both spouses have student loans

Remember our original statement that choosing whether it’s better to file jointly or separately for student loans is more complex? You can’t just simply look at your potential student loan savings when deciding to file separately. You also have to weigh the cost of filing separately.

The basic equation for figuring out whether it’s better to file separately or jointly for student loans comes down to this:

Student loan payment savings married filing separately (MFS) – increase in taxes by MFS

For our hypothetical couple above, the only cost of filing separately would likely be the loss of the student loan interest deduction, which would come out to a few hundred dollars. In this case, the net savings of filing separately make sense even though both spouses have student debt.

When filing separately doesn’t make sense if both spouses have student loans

When we strictly look at the math, it essentially comes down to: Does it cost you more than $2,200 in extra tax prep fees and taxes to file separately?

If it costs you significantly less because you have a straightforward tax situation and will only miss out on the student loan interest deduction by filing separately, then you could save around $2,000 on your student loan payments but lose out on about $500 of student loan interest deduction. Therefore, you could have a net savings around $1,500 a year when filing separately.

But a couple with children would be looking at other associated costs of filing separately, such as losing eligibility for the child and dependent care credit and education tax credits.

Additionally, married borrowers will need to consider their long-term investment strategy and other potential consequences of filing separately.

For example, filing separately eliminates IRA deductions for taxpayers with a modified AGI above $10,000. So, you’ll have to contend with a backdoor Roth IRA if you want to make tax-free withdrawals during retirement.

More importantly, filing separately disqualifies you from receiving the advanced premium tax credit and other subsidies for health insurance coverage. This is arguably the biggest consequence of filing separately for borrowers who depend on subsidized healthcare coverage through the Marketplace. If this applies to you, you could be forfeiting tens of thousands of dollars of subsidies in exchange for a lower student loan payment.

Your potential student loan savings isn’t the only piece of the puzzle. Use our Married Filing Separately Tax Calculator to quickly estimate how much extra taxes you’ll pay when filing separately versus jointly.

Assessing the true cost of filing separately when you both have federal student debt

If you’re married and both have federal student loan debt, it’s not necessarily life-changing to increase your protected income by filing taxes separately. But it does make a difference if you want to maximize your overall savings.

If filing separately costs you less than $2,000 in tax prep fees and missed tax deductions and credits, then you should consider filing separately even if you both have student loans. 

Although saving a couple thousand dollars is great, you might have bigger opportunities for savings by fully optimizing the IDR Waiver, pursuing Public Service Loan Forgiveness (PSLF) or using other student loan strategies, such as the double-consolidation loophole before it’s phased out.

Schedule a consultation with our team of financial experts to get a custom tax strategy to save you the most money.