Help Paying Student Loans

by · 4 comments

DFA reader Carrie asked

I believe I am eligible for loan forgiveness… but what do I do about monthly payments? The “consultant” at Direct Loans told me that if we file separately on our taxes, my payments will be under $300 per month – otherwise, they could be much more. What are the costs and benefits of filing separately versus jointly? Anything we can do in 2011 to make one or the other more beneficial?

I am married, and my husband and I are 30 years old. We have a two year-old son and just bought our first home in April, 2009. Fair credit scores (in the mid-600’s). I have deferred student loan payments since graduating (in 2007) with my doctorate – an academic adventure that allowed me to rack up about $95,000 in student loans. Payments are coming due – for real – in March, 2011. I landed a job this year teaching at a local community college (public), plus I teach some adjunct classes on-line. I make about $45,000-50,000 a year, and my husband makes around $40,000. He has no student loan debt.

My answer

Hi Carrie, God bless you and your family.  I understand your burden of student loan and mortgage debt, and my heart goes out to you because of it.  Hang in there, focus on living a mission-centered life, and God will be with you.

Can you afford the monthly payments?  Other than your student loan and mortgage debt, what other debt do you have?  If you are making a combined $85,000 we should be able to help you figure a way to afford the $300 student loan payment.

Do you have credit cards?  Cancel them and pay them off before your deferment ends.

Do you pay for cable or satellite TV?  Cancel it.

Do you operate your finances using a budget?  If not, then download this budget spreadsheet and get started.

Read this post on additional ways to save money fast.

If you use these strategies you can save money and make your payments.

As for how you should file?  That depends on the full details of your situation.  After searching around a bit, I was able to find 3 articles that should help you figure out your answer.  In reading them, you may lean toward filing jointly if your son frequently attended day care, if you file separately you lose eligibility.  You also lose the ability to claim student loan interest if you file separately, but it looks like you may not have paid any yet, since your loans are deferred.

Here are three links I found giving some pros and cons of married filing separately.  Please read them and feel free to ask more questions in the comments section of this post.  I will do my best to help answer, and so will the DFA Missionaries and community.  Also, your situation will help others who are searching for similar answers way into the future, so thank you for your question.

If you can offer more advice to Carrie, please leave a comment.  God bless.

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1 Paul Williams

Carrie, I’d be careful of filing separately. You lose a great number of tax benefits by doing that. You may have lower loan payments but you could end up paying a lot more in taxes. The best way to work this out is to do several scenarios (filing jointly, filing separately with you claiming your son, filing separately with your husband claiming your son) and see how they come out.

To qualify for loan forgiveness, you’re going to have to do either the Standard repayment plan, Income Contingent, or Income Based. I’m going to guess you probably won’t qualify for the Income Based plan as a joint filing couple and your payments under the Income Contingent plan would probably be higher than under the Standard plan.

I’d recommend playing around with the calculator on the Federal Direct website:

I just helped a client work through the best decision for them on this. There are several moving parts, but you don’t want to focus only on lower student loan payments and forget about the taxes.

2 Steve in W MA

I believe your question revolves around the fact that you have a student loan balance that is about double your income of 50,000, and that by filing taxes separately from your husband you can have your income considered as separate from his in the student loan rules, thereby giving you grounds for loan forgiveness.

Paul’s answer above is excellent. You really need to run the several scenarios through to see both the overall tax outcome AND the overall interest paid on student loans outcome AND the cashflow results of each choice–as I believe you are most concerned about the cashflow requirements of the potentially higher student loan payments.
Normally I calculate these things out by hand, but for the purpposes of your comment I used an online calculator and for a combined income of 85K filing married jointly you pay $13,613 in federal taxes.

If you file married filing separately, your income of 45k will be taxed at $7,471 and hubby’s at 6,400 or so. BUT whichever one of you files as head of household will get about 1,000 off the tax bill. Adding the issue of claiming children as dependents and you may well turn out better on a cashflow basis by filing separately and maintaining the lowest possible monthly payment on your student loan.

There is a lot of missing info from your post that makes it impossible to really know the answer, though. You said you just bought a home–what is the monthly mortgage payment and tax bill? What is your daughter’s daycare bill?

On the face of it you two (three!) have about 85k- 15K of federal and maybe 10K worth of state taxes (I’m really guessing on the state taxes here) or 60K worth of disposable income., or $5,000 per month free cash flow after taxes. It seems to me that you should be able to handle all of your obligations easily on $5,000 per month, even if your student loan monthly payment spikes to around $1000 per month, as it sounds like it might, and your decision really might best be made about about total end costs and not cash flow issues.

3 Steve in W MA

One thing to watch out for is what happens to your student loan payments if one of you loses your job. If the payments won’t adjust down based upon decreased income, and you don’t have enough cash to put aside extra payments in a sinking fund for that event, you may want to file in such a way that the monthly loan payment is as low as possible. If, say, you get it so that it’s at $300 per month but you can afford $1000 per month, consider doing that and putting the $700 away into a sinking fund to pay the payments in the event of a job loss.

however, if there is a mechanism to modify the monthly payments based upon something like income loss, then I would go with the plan that gives you the lowers total end cost, as opposed to the one that gives you the most flexibility. With $5000 per month to work with you should have plenty of room for flexibility in any case.

4 The Prudent Planner

Here is my answer and it’s short and simple. Take a look at the largest expenses you have (mortgage, car payments, child care, etc.) and reduce those first. You can start with small expenses but you won’t make as big of a dent in that $95,000 bill you’ve racked up. Ask yourself how long do you want it to take to pay off that amount? The sooner your answer the more drastic your cuts will have to be and probably the hardest ones to make. That’s my two cents atleast but I’m glad you’re asking on this blog to get different opinions.

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