Student loan forgiveness and income caps: Here’s what married couples need to know

Certain married couples may qualify for federal student loan forgiveness even if their income appears too high to do so at first blush.  

That’s due to how married couples file their annual tax returns and how the federal government is interpreting income qualifications for debt forgiveness.

President Joe Biden announced Aug. 24 that he’d forgive up to $10,000 of federal student debt for most borrowers and up to $20,000 of debt for Pell Grant recipients, who are generally in lower-income households.

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However, there are income caps that target aid to low- and middle-income earners. Single borrowers with annual income below $125,000 are eligible, as are married couples who file a joint tax return with less than $250,000 of combined income.

Income is defined as a borrower’s “adjusted gross income” in 2020 or 2021.

However, there may be some murky situations for married couples based on their income.

For example, let’s say one spouse earns $150,000 but the other spouse makes $60,000. They qualify for forgiveness based on their $210,000 joint income.

However, the higher-earning spouse’s income is over the $125,000 individual limit. Does this person qualify for debt relief, in addition to the lower-earning spouse?

The answer is yes, according to a White House official.

To be clear, not all loans are eligible for debt relief. Qualifying loans include Direct Stafford Loans, all Direct subsidized and unsubsidized federal student loans, Parent Plus and Grad Loans, for example. Private debt isn’t covered. Some debt issued via the Federal Family Education Loan (FFEL) program may not qualify, either.

Another income question may arise for married couples. Let’s say one spouse makes $90,000 and the other earns $170,000. Their joint $260,000 of income exceeds the income cap. But would the lower-earning spouse qualify for forgiveness based on their individual income?  

As of now, the answer appears to be no, tax experts said.

“The law would say they are ineligible, unless some new rule allows the [adjusted gross income] to be reported separately,” said Leon LaBrecque, a certified financial planner and certified public accountant based in Troy, Michigan.

The White House didn’t respond to an inquiry on this point by press time.

Here’s a potential workaround for borrowers in this example: The couple could file an amended tax return for 2020 or 2021. They would elect to file two tax returns — as married filing separately — instead of a joint return. This way, the lower-earning spouse would qualify based on their income.

“Amending the return would get the forgiveness,” said LaBrecque, who is the head of planning strategy at Sequoia Financial Group.

However, borrowers shouldn’t necessarily scramble to file an amended return, he added.

For one, the government hasn’t yet offered key details about certain aspects of the forgiveness plan. For example, while some borrowers may get automatic relief, many others will have to apply — and that application isn’t set to be released until early October.

It’s possible the government could issue rules that allow a lower-earning spouse in the above example to qualify for forgiveness based on their individual income instead of joint income. This would render an amended tax return unnecessary, if it occurs.

“I would say wait until we hear more, if you are in that position,” LaBrecque said. “If no guidance is issued, then amending [a return] will work.”

Here’s an illustration of potential federal tax consequences, provided by LaBrecque. The analysis assumes each spouse takes a standard deduction.

As in the aforementioned example, one spouse made $90,000 in 2021 and the other earned $170,000, for $260,000 of joint income. Their joint tax return would have a tax due of about $44,418.

If they amended and filed separate tax returns, the lower earner would have tax of about $12,787 and the higher earner would have $31,809 of tax — for a total federal tax liability of $44,596. That’s only slightly exceeds the joint tax liability, by $178.

In this case, it’d be worth filing an amended return to get forgiveness for one spouse, LaBrecque said.

But other circumstances could easily flip that outcome and negate the benefits of student loan forgiveness — meaning anyone considering amending their return should carefully review the filing status change, he added.