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Managing Student Loans
Student loan debt can weigh on borrowers for decades. When couples come together to join their lives, combining finances is a big step, and disclosing student loan debt should be part of the discussion. With over 43 million federal student loan borrowers in the U.S., this is an issue many couples face.
Student loans taken out before marriage belong to the partner who took them out. Only that person is responsible for paying the loan back. However, student loan payment amounts could be impacted when a couple marries if the borrower is on an income-driven repayment (IDR) plan. If the couple plans to file their taxes jointly, the borrower could see their student loan IDR amount increase due to the addition of their partner's income. This can be avoided by each person selecting the "married filing separately" status when filing their taxes. In a different scenario, if both partners are on IDR plans and file taxes jointly, the IDR amounts will often decrease because both partners' outstanding student loan debt is taken into consideration.
Student loan debt can significantly impact a person's credit score and ability to make substantial purchases, such as a home. When a couple applies for a mortgage, their debt-to-income ratio is a crucial factor. This ratio includes any student loan debt attributed to either party, underscoring the potential implications of student loan debt on joint financial planning.
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Disclosing Existing Student Debt
Whether you owe hundreds or thousands of dollars in student loans, you should disclose this information to your partner. While it might feel embarrassing, sharing it with a partner will create trust in the relationship. This information will likely come out at some point when applying for a mortgage or filing taxes, so it is good to be forthcoming from the beginning.
Even though the student loan borrower is solely responsible for paying back the loan, having their partner's support in case of a job layoff or medical issue will be extremely important. Ultimately, what impacts one partner impacts the other, especially regarding finances.
An easy way to share this financial information with your partner is by sharing your credit report. Credit reports provide the full picture of a person's financial history and can be requested from each of the three reporting agencies: TransUnion, Equifax and Experian. These reports are free and can be requested once per week. Issues such as delinquent accounts or late payments can be addressed once this information is shared with a partner, and together the couple can create a plan for the future.
Strategies for Repayment
Combining finances with a partner is a good time to reassess your student loan repayment options, including income-driven repayment and traditional repayment plans. Traditional repayment plans base monthly payments on the loan amount and repayment term, while IDR plans base your monthly payment on how much you (and your partner, if filing jointly) are earning.
The repayment plan that worked for you as a single person might not be the best option when you become part of a couple. In most cases, you are not locked into your current repayment plan if it no longer works for you.
It is important to consider student loan debt as part of the larger debt picture, including other debts like credit card debt. Before paying off student loans more aggressively, look at the interest rates for all your existing debt. Most financial advisors will suggest paying off high-interest debt, like credit cards, before increasing the payment on lower-interest-rate student loan debt.
Refinancing student loans is another option available to some borrowers. It allows a borrower to replace a current loan with a new loan with different terms. You might want to consider refinancing if the new loan terms would be more favorable than your current loan. In most cases, refinancing requires a decent credit score and a solid income history.
A partner with a good credit history could offer to co-sign a refinanced student loan, which sometimes offers a more favorable rate. However, this should be done cautiously because the co-signer would then be financially responsible for the loan if the primary borrower defaults. Both parties would be responsible for the refinanced student loan if the couple divorces.
How to Share the Burden of Student Loans
Sharing the actual dollar amounts of existing student loan debt is just the first step in sharing the burden with your partner. When couples understand their financial picture as a whole, they can better plan their future together.
When combining finances, it can be helpful for couples to seek the advice of a financial advisor, especially when student loans are involved. A financial advisor or accountant can provide guidance to assist with debt reduction. They can also provide information about the student loan interest deduction and advice on whether filing taxes jointly or individually would be most financially prudent.
Impact on Joint Financial Planning
Student loan debt should be considered when couples come together, as it can greatly impact decisions like buying a house and having children. It could also delay retirement if you cannot save as aggressively as you would have without the student loan payments. It is important to have an emergency fund, ideally three to six months' expenses, available before you consider paying down your student loan debt more aggressively.
Any student loan debt taken out after marriage should be considered by both parties. If the couple is in a community property state, this debt would be considered community debt and both parties would be responsible for it in case of divorce.
It's also important to know whether your student loan debt will be discharged in case of death. This is typically true in federal student loans, but it can vary with private student loans.