Like many same-sex couples, Eric Henry and Tom (he prefers not to use his last name for privacy), his partner of three years, were thrilled when the U.S. Supreme Court ruled in favor of marriage equality in June 2015.
However, unlike the thousands of couples who headed to the altar in the wake of the court’s decision, the two who live in Overland Park, Kansas, decided to put their marriage plans on hold.
The primary reason? Tom’s student-loan balance totaling more than $300,000.
“He’s currently on an income-based repayment plan,” Henry says, “so he’d have to pay quite a bit more once my income was factored in.”
Henry and Tom aren’t the first couple to delay marriage because of a burdensome debt load. Thirty-seven percent of respondents to a 2014 survey by the National Foundation for Credit Counseling said they wouldn’t marry someone with a “large amount of debt” until such obligations were paid in full.
Even if your soon-to-be spouse’s debt doesn’t scare you off, understanding how marriage impacts your finances in general – and student loans in particular – is essential to avoid surprises later.
“It’s surprisingly common for me to talk to people who have no clue about their spouse’s history with or thoughts about debt,” Andy Smith CFP, an investment advisor with The Mutual Fund Store says.
“Poorly handled debt stays with you for the rest of your life, so it’s important to have those conversations as early and as frequently and as openly as possible. Don’t not have those talks because you’re scared about the outcome – whatever pain or embarrassment you might feel is far less than what you’ll experience if you pretend these sorts of things aren’t an issue.”
“It’s important to have conversations about debt as early and as frequently and as openly as possible.”
Here’s what you need to know about student loans and matrimony:
Legally, how do the other person’s student loans affect you?
The answer depends on:
- Where you live
- What type of student loans you owe (i.e. federal or private)
- When the debt was incurred (i.e. before or during your marriage)
Who is responsible for the debt?
If you take out a student loan during a marriage and live in a community-property state, your spouse might be legally responsible for the debt regardless of whether he or she serves as cosigner.
All federal student loans (and some private) have what’s called a “death discharge,” which means that when the original borrower dies, the surviving spouse is not liable for the remaining loan balance.
Earnest does have this provision, but some private loans do not. Those lenders could come after families and cosigners in an attempt to recoup the debt, Smith says.
How does marriage impact your income-based repayment plan? Your taxes?
There are several income-based repayment plans offered by the government, and depending on the plan, it caps your student-loan payments at 10-15% of your discretionary income. Depending on your tax-filing status, getting married could significantly increase your monthly bill, or even disqualify you from the repayment plan altogether.
“If you’re married filing jointly, all of a sudden you have a much larger income,” Smith says. “If you can handle (the increased student-loan payment), great, but if not you might run into trouble.”
Going the “married filing separately” route separates your income from your spouse’s, possibly making it easier for you to continue with income-based repayment; however, you might lose your ability to claim the student loan interest deduction or other education-related tax credits. (In these situations, it’s best to consult a tax professional to see which tax-filing status is best for you and your spouse.)
How do student loans influence your ability to take on a mortgage or other debt?
The answer depends on the type of mortgage you’re seeking, Smith says. For example, if you apply for a home loan backed by the Federal Housing Administration (FHA) – a popular option for young, first-time homebuyers – a portion of your student loans are included in your debt-to-income (DTI) ratio as calculated by the mortgage lender. Prior to September 2015, the FHA gave borrowers a pass on this so long as they had been granted a temporary deferment of at least 12 months.
“For an optimal mortgage, your DTI ratio needs to be less than 36%,” Andy says. “If your student loans put you above this number, there are only three ways to fix it: borrow less, increase your income or pay down your student-loan debt, and reapply. When people take out massive amounts of student loans, some necessary and some not, they’re thinking much shorter term instead of the long-term ramifications. This stuff is going to stick with you forever.”
The bottom line
Smith encourages all his clients to discuss financial priorities – including money philosophies, retirement goals, and feelings about debt – with their spouse or partner. And while paying off your student loans and other debt is a worthy endeavor, it has to be balanced with planning for the future.
“You’ve got to figure out a portion of every dollar you earn that should go to debt service and either a savings account or 401(k),” Smith says. “People who begin saving early are going to be in a much better place come retirement, even if they only save 1% of their income to start. Don’t make the mistake of thinking it’s not worth it because it is. You’re never going to get these early years back.”