For taxpayers and borrowers making student loan payments, they should check out the Saving on a Valuable Education (SAVE) Plan that partially went into effect this past summer.  The SAVE Plan replaces the Revised Pay As You Earn (REPAYE) Plan.  Additional SAVE Plan benefits are scheduled to be implemented beginning July 2024.

The SAVE Plan is an income-driven repayment (IDR) plan for student loans.  Under this IDR plan, monthly payments are determined based upon the borrower’s income and family size.  There are two major changes that were implemented as a result of the SAVE Plan this past summer that may impact the amount of the monthly student loan payment and are based upon the borrower’s “discretionary income” calculation noted below:

  1. A borrower’s discretionary income is the difference between their Adjusted Gross Income (AGI) and 225% of the poverty line (exemption amount).  Because the SAVE Plan increased the exemption amount from 150% to 225% of the poverty line, a borrower’s discretionary income will be lower, and they may qualify to make a lower monthly student loan payment.
  2. If a taxpayer files his or her income taxes separately from their spouse, that borrower can exclude their spouse’s income in determining their AGI, resulting in a lower AGI amount and therefore potentially qualifying for a lower monthly loan repayment amount.

One major consideration with regard to item #2 above, taxpayers will need to determine if the total dollars being saved as a result of making smaller loan payments when excluding a spouse’s income in calculating IDR will result in a larger cash benefit when compared to the potential increase in income taxes from filing taxes separately from their spouse.  Generally, taxpayers will see a tax benefit when their tax filing status is married filing jointly compared to married filing separately.  Married filing separately is generally not a tax favorable filing method for most married taxpayers.  Taxpayers considering filing taxes separately from their spouse to take advantage of excluding their spouse’s income in the IDR calculation, should consult with their tax preparer as well to determine whether or not there is a significant tax cost as a result from filing taxes separately.