LB Note: Today's post is by Dan, he’s a guest author from Dinks.co, a new blog about a dual income, no kids marriage. Since I am only recently married, and also without student loans I wanted to find out how couples navigate this complex money topic.
For many Americans, student loans are a necessity of obtaining a college or graduate degree. Many couples bring in different levels of debt and have varying income levels and abilities to pay off their loans. It can be challenging to decide how to approach student loan debt after marriage, particularly if there is a large income or debt disparity.
Because this is such a common issue for many couples, it is vital to address it head-on — before the wedding. Being honest about how much debt you have, and your ability to repay it, can help to avoid problems down the road about who is responsible for these loans. It can also ensure that your debt doesn’t torpedo your other financial goals, such as buying a house.
Below are the three most common options for couples seeking advice on how to approach student loan debt after marriage.
Option #1 – Refinancing Your Student Loans Together
One option for couples with student loan debt is to refinance. This may be a particularly attractive option for borrowers with multiple student loans or couples where one spouse has a higher credit score. When refinancing, a borrower applies for a new loan to pay off existing student loan(s), typically obtaining a lower interest rate and shorter loan term. (We recommend Earnest as a great option for refinancing, too!)
Refinancing is only available through private banks and can be used for either private student loans, federal student loans, or a combination of the two. However, if borrowers choose to refinance federal student loans with private student loans, they should be aware that they will lose the protections of federal student loans. Learn more about spousal student loan consolidation here.
The main hurdle for refinancing student loans as a couple is that only one bank, Purefy, currently allows couples to combine loans. While it is advantageous to be able to use your household’s combined income and one spouse’s high credit score to obtain a better interest rate, there is no ability to shop around and obtain a better rate. Perhaps more importantly, in the event of a divorce, a refinanced loan will present caustic issues when it comes to the division of marital assets and debts.
The federal government does not permit borrowers to consolidate student loans as a couple. These loans must be kept separate, unless they are refinanced as described above, as part of a private loan.
Option #2 – Keep Student Loans Separate
One option that may serve many couples best is to simply continue to pay their student loans separately as opposed to consolidation. This not only helps keep arguments about debt out of the marriage, it will prevent any issues about splitting up the debt in the event of a divorce.
This choice has the benefit of being simple: each person is responsible for his or her own debt. However, there may be arguments against it, particularly when it comes to achieving financial goals as a couple. In many ways, a marriage is a merger, and keeping finances separate in this way can work against long-term goals, like saving for a house or for retirement. If a couple can join forces to tackle debt together, they will likely become debt-free much more quickly — and be able to save more money on interest payments. If you choose to tackle debt together, come up with a game plan to do so, and be sure that you are each on board with the plan.
Option #3 – Income-Contingent Repayment Plans
When you get married, your household income will likely change significantly — which will then impact your payments if you are on an income-driven repayment plan for your federal student loans. This will primarily occur if you choose to file your taxes jointly as opposed to separately, although there are tax implications for each choice. One option may be to consider an income-contingent repayment plan instead of an income-driven repayment plan.
As always, consulting with a tax specialist or financial consultant about how marriage will impact your student loan payments is a smart decision before you get married.
Student loan debt does not have to be a burden on your marriage. If you communicate openly with your spouse and work together to come up with a plan for managing your debt, you can pay it off together or separately — and still meet your other life and financial goals.