Most people believe that marriage is an economically beneficial arrangement. That’s not always true.
Sharing your finances can also make it easier to reach savings goals and pay off debt. My husband and I paid off more than $50,000 of student loans within two years of getting married — a feat he likely wouldn’t have achieved without both of our incomes.
But let’s stay on the student loan point for a minute. There is more than $1.57 trillion in outstanding federal student loans in the U.S. Many, but not all, borrowers are eligible for some form of an income-driven repayment plan. These plans cap a borrower’s monthly payment at a rate that’s based on their earnings rather than on the loan’s outstanding balance and a standard 10-year repayment plan.
However, if you get married and file a joint tax return, your spouse’s income will be included in the calculation for how much you owe. If both parties have debt and are on income-driven repayment plans, this hike in monthly payments could be lethal for the household budget. Technically, you can still file separately, and oftentimes your payments will continue to be based on just your income — but you won’t be receiving the same tax benefits of being married and filing jointly. And you need to read the fine print of your income-driven repayment plan, as some do include a spouse’s income, even if filed separately.
Income-driven repayment plan calculations are based on your adjusted gross income, family size and discretionary income. According to Federal Student Aid, discretionary income is calculated as the difference between your annual income and 150% of the poverty guideline in your state for your family size.
Consider a hypothetical. Say you earn $55,000 annually as a single taxpayer. Your monthly student loan payment would be capped just shy of $300. But if you get married to someone who earns $100,000 annually, your monthly payment, if you file jointly, could jump to nearly $1,075. If you’re both on income-driven repayment plans, that could mean around $2,150 a month in payments. Some income-driven repayment plans will never exceed what you’d pay on a standard 10-year term, but the REPAYE program doesn’t have a cap and your spouse’s income is included even if you file separately. (This simplified math doesn’t factor in potential interest subsidies from PAYE or REPAYE programs.)
For high-income earners, it can also be costly to get married from both a tax and student loan perspective.
Let’s start with taxes. The “marriage tax penalty” used to happen a bit more frequently when the combination of both spouse’s salaries pushed them into a higher tax bracket. The current 2021 tax code mostly only levies the penalty against high earners in the 37% tax bracket. Single filers earning more than $523,600 fall into this bracket, as do married couples earning more than $628,300. This threshold could be lowered under the Biden administration, though, which may give some high-income earners pause about how much marriage could ultimately cost them, even if you’re filing separately.
Then, if those same high-income earners also have significant student loan debt, it could be a double whammy of increased monthly payments on debt plus more taxes. It’s not uncommon for high-income earners, especially attorneys and medical professionals, to have loans either.
Marriage does come with certain built-in protections depending on your state’s laws surrounding estates and next of kin. Filing a marriage license often means your spouse is legally able to make medical decisions if you can’t, visit you in the hospital and inherit your estate.
But this can also be handled for unmarried, committed couples fairly easily — it just takes a little more paperwork. Many of the rights bestowed upon married couples can be covered with cohabitation agreements, power of attorney, advanced health-care directives and proper estate planning. Even some insurance plans cover domestic partners. Unfortunately, Social Security benefits are likely not something that can be passed on to a committed, but unmarried partner.
For those who choose to get married even after doing the math, it also stands to reason that you should file a little extra paperwork yourselves — by which I mean a prenuptial agreement.
Before legally yoking yourself to another person, it’s perfectly reasonable to pause and make sure a marriage license actually makes the most sense financially for you. People will always push back against what’s seen as outside the norm, so don’t let the pressure to “just get married already” get in the way of what works best for the two of you.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Erin Lowry is the author of “Broke Millennial,” “Broke Millennial Takes On Investing” and “Broke Millennial Talks Money: Stories, Scripts and Advice to Navigate Awkward Financial Conversations.”
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