Financial confusion, help please!

January 4, 2012 9:46 AM

Should we file taxes separately or jointly? Pay off a chunk of student loans now or pray for forgiveness? Help me identify the interaction of these questions. I'm not good with money! Details inside.

Me: 30 y/o graduate student who will finish PhD in a year. 45K in interest-deferred student loan debt. Not sure of interest rates on various loans. No credit card debt. No car payment, etc. 21K in Roth IRA. 13K in savings. Present income hand to mouth. Future income 50K+.

Him: 27 y/o stable corporate job w benefits earning 42K annually. 11K in student loans, being paid as agreed on 10 year plan. No credit card debt. Contributing to Roth up to maximum company match. Savings are small but growing.

Future plans:
-We are getting married in 10 months.
-We want to have kids. I want to stay home with them some, therefore I expect to be in and out of the paid labor force over the next few years.
-We want to buy a home where the mortgage (and insurance, property taxes) will be less than we pay in rent. This is possible where we live.
-I will probably be eligible for Income Based Repayment. I may also be eligible for Public Service Loan Forgiveness (if a non-partisan policy institute on a state university campus qualifies).

-Can I consolidate my student loans now for lower interest? Should I? How?
-I have this urge to use my savings to pay down student loans, but I think it might be stupid since forgiveness is a possibility. What would you do?
-I am confused about whether there is more financial benefit to filing our taxes separately or jointly. His considerably better financial situation might preclude me qualifying for Income Based Repayment. What things should I be considering?
-If the advice is: consult a financial planner, can you tell me where I can find someone who won't steer me wrong?

I'm kind of an idiot financially, luckily I'm a pretty frugal idiot.

posted by powerbumpkin to work & money (15 answers total)

Are they federal loans or private loans?

Keep in mind that you can't deduct loan interest payments if you file taxes separately. This can be a significant chunk of change.
posted by PhoBWanKenobi at 9:51 AM on January 4, 2012

Together or jointly is mostly figured out by filling out your taxes both ways, looking several years down the road at doing the same, and figuring out which gives you a lower tax burden. I can't help much with the rest.
posted by introp at 9:58 AM on January 4, 2012

They are federal subsidized loans.
posted by powerbumpkin at 10:09 AM on January 4, 2012

I don't think it is a given that you are eligible for Public Service Loan Forgiveness. I know low income inner city school teachers who have had to go through multiple rounds of documentation to be qualified. Teaching at a state university seems questionable to me - but I have no expertise here.

Also - this. "The forgiveness occurs after 120 monthly payments made on or after October 1, 2007 on an eligible Federal Direct Loan. Periods of deferment and forbearance are not counted toward the 120 payments."
posted by quodlibet at 10:17 AM on January 4, 2012

These two are helpful - Income Based Repayment and Public Service Loan Forgiveness. PDFs from Dept. of Ed.
posted by quodlibet at 10:19 AM on January 4, 2012 [1 favorite]

Are you talking about how you should file your taxes this coming April? If so, then I think you'll have to file separately, as your tax return filed in April 2012 is based on your income and marital status in 2011. If you two are not yet married then you'll not have been married at any time in 2011 and will need to file as single.

As to your other question, I wouldn't use your $13K in savings to pay down student loan debt if you're planning on buying a house in the near term. Even with a first-time homebuyer FHA loan, you'll need to be able to put 3.5% of the house price down plus pay closing costs which typically are at least a few thousand dollars. Not to mention, you really want to have a little cushion after you buy to deal with the inevitable water heater failure, broken front door, or whatever that you'll be wholly responsible for.
posted by iminurmefi at 10:21 AM on January 4, 2012 [1 favorite]

Pay off a chunk of student loans now or pray for forgiveness?

Whatever you do, a financial plan should never involve praying for good fortune.
posted by mhoye at 10:30 AM on January 4, 2012 [2 favorites]

The loans are currently deferred (with no interest), and should be until 6-9 months after you complete your program. No reason to pay them down now, especially since you want to purchase a house in the near future. Consolidating the loans while in deferral or grace takes them out of deferral/grace and makes them repayable immediately. So do not consolidate until you are in the last month or so of your grace period. Additionally, consolidating federal loans doesn't lower the interest rate, though it does make the payment process easier. Income based repayment is based on the family income, which will include your spouse's income after marriage. If you qualify (for example, during the times you're a stay-at-home mom), the reduced payments are a big help, and after 10 public service years the remaining debt is forgiven (public service includes 501(c)(3) organizations, which a lot of universities are).

In general, married filing jointly is more advantageous than filing separately, as many deductions are not available if you file separately. This only will apply starting 2012 tax year.
posted by melissasaurus at 10:54 AM on January 4, 2012

Don't consolidate your loans. You used to be able to get a lower rate, but now they just average your rates. If you don't consolidate, you can pay off the higher-interest loans first and leave the lower-interest ones until later.

I doubt your eligibility for forgiveness, income-based repayment, or anything else related to loans will be affected by whether you file separately or jointly after marriage. If you are willing to not get married at all, that's pretty much the only thing that will help with your loan status.

I would make the loan payments and hold on to your savings for a couple of years until you figure out how much you will need for a down payment on a house, pre-kid savings, etc. Also, if you buy a house, you should keep money aside for repairs and furniture, and an emergency fund that will allow you to pay your bills and mortgage in the event that both of you are at of work at the same time. Figure out some amount that you feel comfortable having in the bank to cover unexpected costs and emergencies; routine costs including maintenance and medical bills; and spending goals such as a down payment, new car, etc. Once you build up that amount, you can think about repaying the student loans faster.
posted by chickenmagazine at 10:54 AM on January 4, 2012

With regard to income based repayment and whether or not filing jointly or separately impacts the calculation: "Lenders will factor in both spouses' federal loan debt - and their joint income - when calculating IBR payments. Each spouse's IBR payment will be proportional to their debt amount. " If you are married filing separately, IBR is calculated based upon your individual income and individual loan burden. More here. This is a change from the prior rule.

OTOH, married filing separately can only be done if you both itemize and will render you ineligible for some tax credits, such as the student loan interest deduction. You have to decide which is better: the interest deduction or the money saved on loan payments through-out the year.
posted by crush-onastick at 11:13 AM on January 4, 2012

It is my understanding that IBR is calculated based on adjusted gross income, which will vary depending on whether taxes are filed separately or jointly. Or am I missing something? Thanks for the answers, very helpful so far.
posted by powerbumpkin at 11:14 AM on January 4, 2012

incidentally, I work for a non-profit, non-partisan policy group (not affiliated with a university) and my employer is a "qualifying institution" for purposes of loan forgiveness. I just called up my loan company and after several irritating conversations was finally able to talk to someone capable of answering the question whether my employer was a qualifying "public service organization".

However, part-time employment with them is insufficient for purposes of loan forgiveness. I am a 3/4 time employee and have not been able to get a complete answer from any student loan organization as to whether or not my loans can be forgiven after the required 120 consecutive payments.
posted by crush-onastick at 11:23 AM on January 4, 2012

Keep in mind student loan forgiveness would only happen in the earliest at 2017. it has to be 120 MONTHLY payments starting OCTOBER 1, 2007. You also have to work at that public service job for 10 years . So for every monthly payment you have to be at the public service job.

PS I didnt know about this and i am in public service. this could help a lot down the road.
posted by majortom1981 at 11:41 AM on January 4, 2012

If your incomes differ greatly, it is almost always in your favor to file taxes jointly. For example, your standard deduction doubles.
posted by zsazsa at 1:58 PM on January 4, 2012

Regarding your taxes: Use TurboTax, TaxCut or similar. You'll enter all your information and then it will tell you if you are better off filing separately or jointly.
posted by Good Brain at 5:30 PM on January 4, 2012