Written By Travis Hornsby, CFA®, CFP®
Updated on February 6, 2021
One of the weirdest student loan repayment loopholes that I know of is the double debt loophole. It only works for married couples, but it can change the way you think about your student loan debt.
You may not have heard of this one because it doesn’t have an official name. Our team likes to come up with nicknames for the loopholes to make them easier to talk about. It’s like if you were naming a planet. Would you call it by its technical name? Or would you make up a name that’s easier to remember?
Our consultants started calling it the “fighting spouses loophole,” but settled on “double debt loophole for married couples” because both spouses must have student loans from the federal government to use it.
What is the double debt loophole?
The double debt loophole only works for married couples who both have federal student loans. If you both don’t have debt, or if you’re not legally married, this loophole won’t apply to you.
To make it work, one spouse uses the Pay As You Earn (PAYE) or Income-Based Repayment (IBR) plan. This spouse should have more debt than the other spouse which causes a high debt to income ratio.
The other spouse will have a lower debt to income ratio where they owe a modest amount of money compared to their income. This spouse should use the Revised Pay As You Earn (REPAYE) plan.
You must also file your taxes as married filing separately.
PSLF and the double debt loophole
You can’t talk about student loan loopholes without using case studies and examples. Let’s get into a practical example so you can see the benefit.
If you have two spouses that are both pursuing Public Service Loan Forgiveness (PSLF), both should have their remaining loan balance forgiven, tax free, after ten years.
The first spouse is an OB/GYN with $400,000 of student loan debt. Let’s call her Emma. Emma is married to a urologist with a student loan balance of $100,000. Let’s say her husband’s name is David. Both Emma and David are out of training with five years of credit toward PSLF.
Emma makes around $200,000 per year, while David makes $350,000 per year. With a combined income of $550,000, the total monthly payment would be about $4,400 if they were both using REPAYE.
In this example, Emma owns 80% of the student loan debt and David owns the other 20%.
But what happens if Emma switches to PAYE? Then the payment is based only on her income, assuming they file their taxes separately. Her monthly payment with PAYE is about $1,400 per month.
David is on the REPAYE plan, and his payment is based on the proportion of debt that he has. If you take 20% of the combined payment of $4,400, you get a $900 monthly payment.
Keep in mind that, if both spouses were using REPAYE, their combined monthly payment would be $4,400. But their combined monthly payment is only $2,300 when you use the double debt loophole and strategically place each spouse on a separate repayment plan.
That’s a savings of $2,100 every month, or $25,000 per year. Over the 10 year repayment period that PSLF requires, the couple can pay $250,000 less on their student loans.
Student loans are complicated, and it’s difficult to figure this out. That’s why booking a student loan consult is so important – it can save you a lot of money.
More loopholes to save money on student loan repayment
The double debt loophole for married couples is just one of the many loopholes available to help you pay less on your student loans. When we do student loan plans, our team of consultants evaluates other situations to uncover additional savings. Some examples of loopholes we use for our clients are:
- Double consolidation for Parent Plus loans
- Standard cap for borrowers making “too much money”
- Married filing separately to avoid counting your spouse’s income
- Breadwinner loophole for borrowers living in a community property state
- Reverse breadwinner loophole for borrowers living in community property states
- Refinancing ladder for borrowers wanting to buy a house or a business
- Die with your debt loophole for people 60 and up with student loan debt
- Eligibility loophole to add federal loans or agency loans
What to do if you think you qualify for the double debt loophole
Student loans are complicated. Picking the right plan and creating the right repayment strategy is difficult because so many variables exist. But I’ll tell you the same principle that I tell all our consultants: do not make things complicated.
You should be able to understand your student loan plan. You will hurt yourself financially if you go out of your way to make things complicated or if you make a decision and don’t have an obvious reason why.
With the right student loan plan, you shouldn’t have any anxiety about your student loan debt. It should be easy to manage and easy to understand. But that only works if you know what you’re doing because the smallest detail could change your entire strategy.
If you think you qualify for the double debt loophole, book a student loan consult. Our team of student loan consultants will analyze your student loans to see if you’d benefit.
If your balance is $30,000 or less, your best option is to take a straightforward approach to paying off your student loans. But if you owe more than your household income, you need to review your situation with a professional.
After the consult, you’ll walk away with peace of mind knowing you have a clear plan of how to pay off your student loans.
Not sure what to do with your student loans?
Take our 11 question quiz to get a personalized recommendation for 2024 on whether you should pursue PSLF, Biden’s New IDR plan, or refinancing (including the one lender we think could give you the best rate).
Comments are closed.