Should You File Taxes Jointly When Your Student Loans Are in Default?

As a married couple, you and your spouse could enjoy a number of tax benefits from filing jointly, including student loan tax credits and a higher standard deduction. But if one of you has student loans in default, filing jointly might not be so beneficial after all.

If you’re wondering whether to file jointly or separately from your spouse due to defaulted student loans, here’s what you need to know.

Both your tax refunds could be garnished

When your federal student loans are in default, the government has wide-reaching powers to collect. It can garnish your wages, take your tax refund and even cut into your Social Security benefits.

And if you’re filing jointly with a spouse, both of you could lose your tax refund to a defaulted student loan.

“For married couples who file jointly, there’s no such thing as ‘his refund’ and ‘her refund;’ it’s all ‘their refund,’” said Logan Allec, CPA and founder of Money Done Right.

“This means that if your spouse has defaulted on his or her student loans, and you file your taxes jointly with your spouse, then you could see your joint refund partially or fully garnished to be put toward your spouse’s defaulted student loans,” Allec said.

So if you’re expecting to get a big check come tax season, you might just get a big disappointment instead. Note that the IRS should send you a letter of notification if it intends to intercept your tax refund — but at that point, it could be too late to save your return.

Filing separately may or may not be the answer

If you’re hoping to save some of your tax refund, there is a workaround to this issue: You could file taxes separately from your spouse. By filing separately, your partner’s tax refund won’t be impacted by your defaulted student loan, or vice versa.

“If you or your spouse is in default on your federal student loans, it could be one of the few situations where it makes sense to use the ‘married filing separately’ status,” said Matt Frankel, certified financial planner at The Ascent. “By doing this, you’re essentially keeping any debts you owe to the federal government separate from a legal standpoint.”

But separate filing does mean you miss out on the usual perks of filing as a married couple. You might lose certain deductions or credits which would actually be more valuable than saving your tax refund.

“When a married couple files their returns [jointly] … there are many benefits compared to filing single or married filing separately,” said David Cawley, CPA and chief financial officer of Fraim CPA. “In fact, in practice it’s rare for a married couple to file separately and come out with a lower tax liability or overall financial benefit.”

So before going this route, compare both scenarios — filing jointly or separately — to determine which one would make more financial sense for your particular situation. If the comparison gets too muddled, reach out to a tax advisor for guidance on what to do.

Defaulting on student loans has other consequences, too

Even if you’re able to save part of your tax refund by filing separately, you won’t be out of the woods when it comes to the challenges of student loan default.

As mentioned, the government can garnish your wages, tax refund and Social Security benefits. Debt collectors could start calling over and over, and your credit score could take a serious hit.

So the best step you can take for your finances is getting your student loans back into good standing. You can revive federal student loans in one of two ways:

  • Direct loan consolidation: Agree to put your loans on an income-driven repayment or to make three on-time consecutive payments on your loans. Consolidation is the fastest way to get your federal loans back into active repayment status.
  • Loan rehabilitation: Agree to make nine on-time payments in a 10-month period, none of which should exceed 15% of your discretionary income. After this time, your loan will be back in good standing, and your default could be removed from your credit report.

If you’ve defaulted on private student loans, on the other hand, you’ll need to speak with your lender about how to rehabilitate your debt. While private lenders can’t garnish your wages or tax refunds, they can bring you to court for walking away from your loans.

Whatever moves you can make to get your student loans out of default could ease the financial pressure and stress for you and your spouse.

Make the right moves this tax season

Defaulting on student loans can lead to a number of nasty tax consequences, which can unfortunately affect both of you if you’re married and filing jointly.

If you’re hovering near default, reach out to your loan servicers for ways to manage your debt. You might be able to lower monthly payments so they become less burdensome.

And if you’ve already defaulted, make moves to rehabilitate your loans. Depending on your income, some income-driven plans offer payments as low as $0.

Not only will keeping your loans in good standing save you a lot of headaches, but it could also actually benefit you during tax season.

If you paid student loan interest over the year, for instance, you could qualify for the student loan interest deduction.

So if student loans are dragging down your finances, look for ways to reduce the burden so you can avoid default and save both you and your partner’s tax returns.

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