Tax filing considerations when spouse has significant student loans

[ingy]

Hello All,

I did some searching, but was unable to find a thread that dealt with this specific issue.  Please accept my apologies if I missed it. 

My wife has student loan debt of around $196,000.  She works in the public sector, and is eligible for loan forgiveness after working for the government for 10 years.  It's an income-based repayment program, and her monthly payments are calculated based on her salary.  She's about three years into this program and makes around $56,000.  She must re-certify for the program each year. 

I work in the private sector and made around $160,000 last year.  At the beginning of this year I took a more entrepreneurial position.  Quality of life has improved, but salary has been cut about 45%. 

We were married at the end of 2014, and filed our taxes "married, filing separately" for 2014 and 2015.  My wife's income-based repayment program will continue to only take into account her salary as long we don't file jointly. 

Last year we received a small refund for our 2014 taxes.  This year we owe about $3500.  It's pretty clear that we did not allow for a sufficient withholding on our respective W4s .  Unfortunately money is tight with my new position.  I've played around with some repayment calculators online and done quite a bit of research on the pros and cons of filing jointly vs. separately.  We could reduce the amount owed this year for our 2015 taxes to around $1000 by filing jointly, but the monthly payment for her loans would increase substantially the next time she has to re-certify.  However, by filing separately there are a lot of deductions we will not be eligible for.  While the vast majority of resources suggest that it is generally more advantageous to file jointly, given our specific circumstances, it appears that continuing to file separately makes the most sense for us. 

Is there anything that I'm overlooking? 

[randymarsh]

Filing separately is typically not advantageous, but PSLF and IBR change the equation. Yes, you're giving up deductions/credits/etc but the low student loan payment should outweigh it.

Your wife's payment is around $400 according to the Department of Education repayment estimator for IBR. Or possibly as low as $266 if she's eligible for PAYE.  Contrast that to the 10 year standard repayment - $2,176.

By filing separately, you are saving $20,000 each year. I don't think there are anywhere close to enough deductions or credits that would make filing jointly worth it.

[former player]

You are still earning about $140k per annum between the two of you.  Why is money tight?  Do you know what forum you are on?

[forummm]

I thought IBR was based on the household. I wouldn't have thought that would change based on whether you filed jointly or not. But hopefully you would know better about that.

Looks like that's the case. Wow, what a huge loophole/way to game the system.

A married borrower can exclude her spouse’s income from IBR and then include her spouse in her household size, reducing her payments and increasing loan forgiveness.

[ingy]

Thank you for your replies and thoughtful feedback. 

@former player - my fault, I failed to mention that I have student debt too.  Although it's less than my wife's, I'm not in an income-based repayment plan and am trying to pay down as quickly as possible.

[charis]

I thought IBR was based on the household. I wouldn't have thought that would change based on whether you filed jointly or not. But hopefully you would know better about that.

Looks like that's the case. Wow, what a huge loophole/way to game the system.

A married borrower can exclude her spouse’s income from IBR and then include her spouse in her household size, reducing her payments and increasing loan forgiveness.

We didn't find it to be a particularly useful way to game the system - I have a much higher salary but a higher loan amount and spouse has loans too, so filing jointly doesn't hurt us too much.  It looks like it could be in this particular situation (the non-borrowing spouse has a very high salary and the borrowing spouse has a low salary and very high debt).