How does marriage impact financial aid and loan repayment?

I recently spoke with US News on the subject of how marriage can impact financial aid for both students and parents. You can find the article here. Below I'll provide an overview with my thoughts in general.

How marriage impacts student loan repayment

The article mentioned above focuses on the impact marriage can have on student loan repayment. Essentially, there is currently a marriage penalty held against those that are in the process of repaying student loans.

When a student is repaying their loans, specifically those through the federal government, they have an option to have these repayments become based on the amount of income they earn. This is otherwise known as income-based repayment. When students become married, they will need to begin accounting for their spouse's contribution when determining their household income. As you can imagine, this can have a significant impact on income-based repayment amounts, and it can even disqualify students from this program.

As a result of this, students must seriously consider the impact that getting married and their resulting tax filing status will have on their student loan repayment and corresponding overall budget.

The problem has a greater reach when you consider the tax advantages married couples receive for filing taxes jointly. This joint status, which provides tax benefits for couples, is exactly what limits opportunities when it comes to more favorable loan repayment terms. Lenders will ask for tax returns in order to show income earned for the individual and household.

To avoid these income-based repayment issues, married couples have begun to file separately. While this causes them to miss out on tax advantages, it helps keep their repayment terms more favorable which can have a significant impact on their monthly budget.

While there has been legislation put together that proposes a third option which could allow couples to take advantage of the tax benefits that come with filing jointly while still utilizing income-based repayments, this doesn't appear to be something that will be enacted in the near future.

How marriage impacts financial aid eligibility

Recent college graduates are not the only group that has to consider the ramifications of marriage as related to financial aid. This also impacts parents of those students that are heading to or currently attend college, along with independent students who no longer rely on their parent's tax information.

When considering a household's financial aid eligibility, a school wants to know the income of the household, among other things. For financial aid reporting purposes, it is fairly easy to NOT report a boyfriend or girlfriend of the parent, in the case of a dependent student, or a student's live-in boyfriend or girlfriend, in the case of an independent student, since there are no documents tying the two together. But when a couple becomes married, they will begin filling out tax forms accordingly. If a school receives anything that is indicating marriage in a household that doesn't report two parents, questions are likely to be asked.

In most cases, both parents of a household need to be listed on financial aid forms so the school can account for the full picture of the household. This is even the case if there has been divorce and remarriage. In these cases it's not uncommon for the remarried spouse not to have any involvement in sending their step-children to college. However, their financial information will be required since the couple is married and living in the same household. For this reason, couples are deciding to delay marriage so as not to negatively impact the financial aid eligibility of their children and step-children.

Overview

While it may sound crazy, financial aid is currently impacting not only the way individuals complete their taxes but also their decision on marriage. Since both of these decisions are extremely important, as well as the financial aid impact they can have, you should speak with tax and financial aid professionals when making a decision.