The following analysis is provided by William C. Penn, Public Interest Law Coordinator at Lewis & Clark Law School.  Thanks, Bill!

The U.S. Department of Education recently produced a Q&A guide pertaining to the College Cost Reduction & Access Act’s Income Based Repayment (IBR) program.  The Q&A mentions that starting in July 2010, married borrowers who file a joint tax return will be able to consider the income AND the debt of both spouses when calculating IBR payments and eligibility.  I did not see a clear description of how the changes will alter the amount that married borrowers have to pay, so I read through the Federal Register for Thursday October 29, 2009.

What follows is my rundown of the changes:

1. Graduates will be able to pick the greater of the amount of their loans when they began repayment or the amount of their loans when they request Income Based Repayment to use in the equations that determine
   eligibility for using Income-Based Repayment.  In the real world, this means that some graduates who might not have qualified for IBR at graduation may be able to qualify later if their loans have grown due
   to circumstances like deferment.
2. The calculation method for determining Income-Based Repayment amounts for single graduates remains the same.
3. The calculation method for determining Income-Based Repayment amounts for married graduates filing separate tax returns remains the same (count only individual income and only their individual debt in
   the equations).
4. The calculation method for determining Income-Based Repayment amounts for married graduates filing joint tax returns is very different: 

•  
  • In determining qualification for IBR, both the joint income and the joint debt of the couple is considered.  This means, for qualification, a joint tax return filing married couple will be
    treated as a single unit for both income and debt.  The qualification question is:  does the IBR equation produce a smaller payment amount when calculated using the joint income than a standard 10-year payment plan based on the joint debt.  If one spouse qualifies, the other does
    as well.  Fewer graduates will fail to qualify because their joint income is too high.
  • For calculating the amount that each spouse must pay toward their student loans under IBR, the joint IBR equation [ (15% of (joint income minus 150% of the poverty guide)) divided by twelve]  is multiplied by the individual spouse’s share of the total student debt.  So, if one spouse has 30% of the student loans, they pay 30% of what the IBR equation produces using joint income.  The other spouse would pay 70%.  The result is that under the new equation married filing jointly couples will, together, pay HALF as much on their loans as
    they pay together under the old calculation method!

What Does It All Mean?

In the real world, this change means, starting in July 2010, married couples who use IBR and file joint tax returns will pay close to what two unmarried people in the same situation would pay.  Considering the loss of deductions when filing tax returns as married filing separately, married graduates will likely be better off filing taxes jointly if both spouses are attempting to use IBR.  (In scenarios that I have run calculations for, couples filing jointly and using the new equation should save at least few hundred dollars per year over filing
separately.)

An Example (using rough calculations)

• Take a couple, both partners making $40,000 per year and with $100,000 in debt each (plus a large number of plain-vanilla assumptions for estimating their taxes).
• As single people, together they pay about $6,400 under IBR toward their loans and about $8,800 in taxes – $15,200 in loans and taxes.
• As married-filing-separately, together they pay about 7,100 under IBR toward their loans and about $10,000 in taxes – $17,100 in loans and taxes.
• As married joint filers under the new rules, together they pay about $8,000 under IBR toward their loans and about $8,800 in taxes – $16,800 in loans and taxes.
• UNDER THE OLD RULES The married joint filers, together pay about $16,000 under IBR toward loans and about $8,800 in taxes – $24,000 in loans and taxes.
• WITH THE NEW RULES, the handling of married joint tax filers is what it should have been from the start.