For physicians, enrolling in Income-Driven Repayment Plans in pursuit of Public Service Loan Forgiveness (PSLF) can be complicated, and even more so for individuals who are married and have the option of filing their taxes jointly or separately.
There’s good news for physicians who are married (two residents and/or fellows for example) and have similar incomes and/or both have federal student loans. In this case, the enrollment process is straightforward and similar to that of a single tax filer. We will revisit this scenario later in the article when talking about Dr. Orange.
However, if you are one of the many physicians who have a spouse with a different financial and/or career background, then you may have more questions about how your tax filing can impact your student loan repayment strategy.
Below are some examples of physicians who may want to consider filing taxes married-separately to lower their monthly payments:
Dr. Blue is a Physical Medicine & Rehabilitation resident with sizable federal student loans. Their spouse is an engineer without federal student loans.
Dr. Green is an Internal Medicine resident applying for Endocrinology Fellowship. They’d like to stay in academics and pursue Public Service Loan Forgiveness. Their spouse & classmate did not match in fellowship and is spending a year doing locums while paying down their private loans before returning to training.
To dive deeper into these scenarios, it’s also important to understand the basics of the income-based and driven repayment plans options:
Revised Pay As You Earn (REPAYE): Income-Driven Repayment Plans consider total household income to calculate payments if someone is married, regardless of their filing status. For Dr. Blue, this means they will use their resident salary plus their spouse’s income. This can lead to high monthly payments depending on their spouse’s income – possibly higher than their PGY salary.
Income Based Repayment (IBR) & Pay As You Earn (PAYE): It’s possible to have Income-Driven Repayment Plans use your individual salary when calculating monthly payments if you file taxes married-separately and document your income properly. This typically costs a physician more from a tax-filing standpoint but can be advisable if it leads to greater savings on your monthly loan payment.
In all these plans above, monthly payments are applied proportionately to each spouse based on their federal student loan balance.
For example, let’s revisit the first couple we mentioned who got married in training who are both residents/fellows with similar incomes. Both have federal loans and do not have dependents. Dr. Orange is a PGY2 in Radiation Oncology with $200,000 of loans and $60,000 salary. Their spouse, Dr. Juice, is a PGY4 in Diagnostic Radiology with $400,000 of loans and a $70,000 salary.
- If they are enrolled in REPAYE or PAYE, their household’s monthly payment would be $854/month.
- Dr. Orange has 1/3 of the federal student loan liability, so their payment is 1/3 of $854 = $285/month
- Dr. Juice has 2/3 of the federal student loan liability, so their payment is 2/3 of $854 = $569/month
Let’s compare this to Dr. Blue, whose spouse does not have federal student loans. Assuming the same income as the Orange-Juices’, the household’s monthly payment would be $854/month.
- Since Dr. Blue has 100% of the federal student loan liability, their monthly payment is the full $854/month ($10,248/year).
- However, if Dr. Blue were enrolled in PAYE and filing their taxes married-separately, their monthly payment would instead be based solely on their $60,000 salary and would be $271/month ($3,252/year).
This $7,000 difference is a driving factor in Dr. Blue’s tax filing decision, so they sought advice from a tax professional to discuss the difference in tax-filing costs and hassle.
This option also applies to Dr. Green, whose spouse has private student loans. When determining the monthly payment in Income-Driven Plans, private loans (even if refinanced from federal loans) are considered the same as having no loans. Only federal loans are included in the payment calculations.
There are several factors to consider when it comes to tax-filing and Income-Driven Repayment plans for physicians. To help navigate this, it’s helpful to speak with someone with extensive knowledge of the Public Service Loan Forgiveness plan as well as a tax professional to find the best strategy for you.
It’s also important to note that the examples above also assume that the physicians involved live in non-community property states. If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, check back for another blog about community property states.
If you have questions about which student loan repayment plan is right for you or how your tax filing can impact your student loan repayment strategy, you can schedule a no-obligation introductory meeting with Kyle Flynn, CSLP® using the calendar link here.
Financial Professionals do not provide specific tax/legal advice and this information should not be considered as such. You should always consult your tax/legal advisor regarding your own specific tax/legal situation.