Earlier this year, student borrowers faced significant uncertainty when the U.S. Department of Education removed applications for income-driven repayment (IDR) plans from its website amid a decision from the SAVE Plan legal challenges. This move sparked significant concern among borrowers who depend on these plans to manage their loan repayments. In response, the American Federation of Teachers (AFT) filed a lawsuit against the Department, challenging the abrupt removal of these critical repayment options. After several weeks of uncertainty, the forms were eventually returned and available, restoring access to the repayment plans.
In a response to the AFT lawsuit, Acting Undersecretary of Education James Bergeron submitted a declaration that introduced a major policy change affecting married borrowers seeking IDR plans. He announced that going forward, IDR plan calculations will include a borrower’s spouse’s income, even if the couple files their taxes separately.
The announcement sparked immediate concern among married borrowers, many of whom deliberately file their taxes separately to exclude their spouse’s income from repayment calculations. The response has been revised to clarify that married borrowers filing taxes separately will now have their spouse included in their household size. This update offers relief to married borrowers who had been strategically filing separately to manage their student loan payments.
Why Was There a Lawsuit?
Earlier this year, the AFT filed a lawsuit against the U.S. Department of Education over its decision to remove IDR plan applications from its website. By eliminating online and downloadable forms, the Department effectively restricted borrowers' ability to apply for these crucial repayment plans.
The AFT argued that the Higher Education Act requires borrowers to have access to income-driven repayment options. The removal of these forms raised serious concerns about accessibility, leaving many borrowers in a difficult position and sparking widespread frustration.
The Department Clarifies
Following backlash from borrowers and organizations like the AFT, the Department has issued an updated statement for married borrowers, bringing much-needed clarity to IDR plans.
Key updates include:
- If married borrowers file taxes separately, their spouse’s income will not be factored into the calculation of their monthly payment.
- However, the spouse will still count in the family size when determining payment amounts.
This clarification is significant because including a spouse in the household size increases the family size, which can reduce the borrower’s monthly payment.
In addition, the ED announced that forms for income-driven repayment plans are now accessible online, and federal loan servicers have been instructed to begin processing applications. These updates bring relief and greater transparency to borrowers navigating the repayment process.
Why Married Borrowers File Separately
Married borrowers who choose to file separate tax returns often do so with a specific strategy in mind. While filing separately typically leads to a higher overall tax liability compared to filing jointly, it may offer an advantage for student loan borrowers repaying under an IDR plan.
By filing separately, a borrower’s monthly payment is calculated based solely on their individual income, excluding their spouse’s. This can make IDR plans far more affordable for those who earn significantly less than their spouse or whose spouse has substantial financial obligations, such as their own student loans.
However, this strategy comes with trade-offs. Filing separately often results in a higher tax burden, which may offset some of the benefits of reduced student loan payments.
It’s crucial to note that while this approach can benefit some families, it isn't a one-size-fits-all solution. Borrowers should carefully weigh the pros and cons and consult with a qualified legal, financial, or tax professional to determine whether this strategy aligns with their overall financial goals and circumstances.
How This Impacts Borrowers
The Department's recent clarification brings welcome relief to married borrowers. It ensures that a spouse's income is excluded when filing taxes separately while still counting their presence in family size calculations. This thoughtful change spares borrowers from potentially steep increases in monthly payments.
One of the most significant updates is the consistent inclusion of spouses in family size for payment calculations—something that was inconsistently applied in the past. Since income-driven repayment plans adjust monthly payments based on discretionary income and family size, a larger family size now means lower payments for borrowers.
This update allows borrowers to plan their repayment strategies with greater confidence. By aligning filing status, family size, and financial planning, the Department has provided reassurance that sudden rule changes won’t derail borrowers’ financial stability. For many, this adjustment offers much-needed peace of mind.
Key Takeaways for Married Borrowers
For married borrowers, here’s what this means for your income-driven repayment plans:
- Spouse’s Income Exempt When Filing Separately: If you and your spouse file separate tax returns, their income will not be included in the calculation of your monthly repayment amount.
- Family Size Includes Your Spouse: Your spouse will now routinely be included in your household size calculation, even if you file separately. This adjustment could help reduce your monthly payments.
- Applications Back Online: IDR plan applications are available again, so if your repayment strategy depends on an income-driven plan, you can now submit your application.
- Lower Payments Possible for Married Borrowers: Adding your spouse to your household size while excluding their income may result in a more favorable monthly payment if you file taxes separately.
If you’re a married borrower navigating the complexities of student loan repayment, it’s worth revisiting your financial strategy and updating your tax and repayment plans accordingly.