Should You Consolidate Student Loans With Your Spouse?
Getting married is supposed to be one of the most exciting experiences of your life. But for those with student loan debt, it can lead to stress and anxiety.
There are too many Americans not getting married because of student loan debt. We recently wrote a piece about some common ways to save money on a wedding.
Marriage can alter your monthly student loan payments, eligibility for the student loan interest deduction, and can unfortunately delay many of the plans that you had for your financial future. But with some advance planning, this doesn't need to be the case.
Should you consider consolidating student loans with your spouse?
What is student loan consolidation?
Student loan consolidation is a federal program that allows you to combine eligible federal student loans in a way that leaves you with one "new" loan and one monthly payment. Your new loan will likely have a new term, depending on the balance that you are consolidating.
Consolidation does not result in a lower interest rate like refinancing does, but it does allow you to retain eligibility for those privileges that your federal loans carry, such as deferment and forbearance.
Can you consolidate student loans with your spouse?
Yes, you can, but at this time, you cannot use a federal consolidation loan to do so. The Department of Education unfortunately ended joint consolidation back in 2006. If you are looking to combine student loan payments with your husband/wife, you'll need to refinance your loans together with a private lender that allows couples to consolidate.
Lenders like PenFed work with borrowers can make this possible.
And while you won't be able to keep your federal loans, you may be able to secure a lower interest rate, which can save you money.
You have two main options to combine student loan payments:
You can actually consolidate your loans together into one new loan, with one interest rate and one monthly payment.
You may also opt to cosign your partners' loan if they refinance to achieve a lower interest rate.
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Spousal loan consolidation
If, as a couple, you decide to refinance your loans together with a private lender, you will receive one new loan that covers both of your outstanding balances. It can be a good option if one partner makes substantially more money or has significantly higher credit than the other, since the highest income and credit score will be used to help determine the new interest rate on your loan.
So, if you're a stay-at-home mom or dad, your spouse's income could early you a significantly lower interest rate than you would otherwise qualify for.
The pros of this strategy are as follows:
Simplification of your student loan repayment - It is not uncommon for a borrower to have more than ten different loans to keep track of, and they may have different terms, rates, and payment due dates. When you multiply that by two, there is no reason why so many couples try to simplify the process however possible.
The potential of a lower interest rate - The chances of saving money in interest may be higher than if you just decided to go refinance alone, especially if you don't have the highest credit score in your relationship. By taking advantage of your husband or wife's credit, you'll be able to save money, money that can go towards your other financial goals.
Unfortunately, no student loan strategy is completely devoid of risk. The first main con of consolidating with your spouse is the lack of participating lender. As of time of writing, PenFed appears to be the only major lender that allows this.
The other con is slightly more dangerous, and it is the permanence of the process.
Once you consolidate together, the process cannot be undone, even if you split or divorce years from now. Many divorce courts will find that each (former) spouse has equal responsibility to pay the debt, which can be problematic if you make significantly less money or didn't have anywhere near as much debt as your former spouse did.
Cosigning student loans for a spouse
If you remember, the other strategy available for couples is to act as a co-signer for your significant other. And while this won't leave you with one monthly payment for both of your loans, it will still significantly simplify the process.
The biggest pro to considering this strategy is that there will be so many more lenders out there for you to consider. Really, instead of only having PenFed as an option, you'll now be able to choose any private lender that allows cosigners.
If you're wondering who to consider, check out our list of private refinancing lender reviews below.
Some lenders offer cosigner release, where you'll be removed from the loan after a certain number of timely payments in a row are made (usually a couple years worth to start).
So if you better credit than your partner, you can function as a cosigner to help them secure a lower rate, and then be removed if/when he or she meets the timely payment requirements.
Of course, the main con to this strategy is that you each will be left with a student loan payment, but two monthly payments are still much better than ten or more.
As an aside, you may not get quite as good a rate, since cosigning typically means that the lender will take into account both "borrowers" credit histories and income.
But it all depends on your financial position.
Getting married with student loan debt
Even if you decide not to pursue the consolidation route, there are still other things that you need to be aware of. You need to be prepared for marriage to potentially change your student loan situation in a number of ways. It's important that you sit down with your significant other and discuss:
The amount of student loan debt you are both bringing to the marriage
How you feel about your repayment
How your student loans may impact the timelines for your other financial goals
While far from the most fun part of preparing for marriage, it's extremely important to know what you're getting into to avoid any conflict down the line.
How marriage affects your student loans
Marriage can also affect your student loan repayment in the following ways:
Your spouse may be held responsible for your student debt
Marriage can change your payments under income-driven repayment
You could lose eligibility for the student loan interest deduction
We'll break these down one by one in the section below.
Your spouse may be held responsible for your student debt
This is definitely something to beware of.
There are two main ways in which your spouse could be liable for your student loan debt.
First, if you have private loans, your spouse may be financially responsible for your loans if you were to die. Federal loans do have a death discharge clause, meaning that if you die, your outstanding balance is discharged. Some private loans do as well, but not all. In that event, your private lender may have a claim against your estate.
The second way in which your spouse may be held liable for your student loan debt is if your spouse cosigns a loan for you. In the event that you default on your loans, there is a legal basis by which your spouse can be held responsible.
But this gets wrinkled a little if you live in something known as a community property state.
As of time of writing, if you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin and are married, the states may hold you responsible for your spouse's student loan debt if you get divorced. Generally, this only happens if the loans were taken out during your marriage.
Marriage can alter your payments under income-driven repayment
If you're on income-driven repayment, getting married may actually increase your monthly payments. This is because IDR payments are based on your household size and income. So, if you and your spouse both have earned income, it is entirely possible that your payments may increase.
This varies somewhat by which income-driven repayment plan you use:
Under Revised Pay as You Earn, your joint income will be considered regardless of whether you file your taxes jointly or separately.
Under the three remaining plans - Income-Contingent Repayment, Pay as You Earn, and Income-Based Repayment - your payments will be calculated using your joint income if you file your taxes jointly, and off your individual income if you file separately.
Of course, filing your taxes jointly can increase or decrease your payments. You're going to want to consider working with a tax expert to determine if you and your spouse should file your taxes jointly or separately. They are qualified to help run scenarios to decide if filing jointly or separately.
Generally, your monthly payments may increase if your spouse makes as much or more than you do.
Your monthly payments may decrease if:
Your spouse does not work
Your spouse is bringing children to the marriage that you can claim as your dependents
Your spouse also has student loan debt
You may lose eligibility for the student loan interest tax deduction
The student loan interest tax deduction allows you to deduct up to $2,500 in interest paid per calendar year. Keep in mind that this deduction is dependent on your income, and your spouse may push your combined income over the threshold to qualify for the deduction.
When filing your taxes in a single status, you qualify for this tax deduction if your modified adjusted gross income (MAGI) is below $85,000, though you won't qualify for the full deduction if your MAGI is above $70,000.
If filing jointly, you'll lose eligibility with an MAGI above $170,000.
Student loan repayment strategies for couples with student loan debt
When you get married, each partner brings forward his/her personal finances, and together they become one. When you approach your student loans with this same approach, you'll notice that the following strategies can help you accelerate your household's student loan payoff.
Refinancing your student loan debt
If you or your partner have outstanding private student loans, you may want to consider refinancing if you can secure a lower interest rate and/or more favorable terms. Now, as we reviewed above, you may not be able to refinance your loans together with your significant other, but do consider refinancing if you'll be able to save a significant amount of time or money.
And remember that you may be able to take advantage of having your partner co-sign on your loan.
You'll want to be more careful before deciding to refinance your federal loans, since you'll lose rights and protections like forgiveness and forbearance.
Make extra student loan payments
One of the greatest (financial) benefits to getting married is increased cash flow, especially if both partners work. With this increased cash flow comes the ability to save up for financial goals more quickly. Things like down payments become easier!
This applies to your student loan repayment too!
If your spouse doesn't have as much outstanding debt as you, consider using this additional cash flow to make student loan principal payments. Regularly, making extra payments off your loan's principal can help you to get out of debt months or YEARS ahead of schedule.
Pursue student loan forgiveness
But there are also many state programs that may be available to you.
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