Case Study One: Two Recent Graduates, Same Salary, Different Undergraduate Debt
How student debt influences financial paths for two recent graduates considering marriage.
This case study follows two graduates with identical salaries but very different student debt levels to show how the new RAP repayment system impacts the financial math of marriage and student debt for one couple. Future case studies will examine other household types, illustrating how student debt and RAP rules can sometimes discourage marriage and sometime create a financial penalty for people who choose marriage.
Introduction: The 2025 RAP bill revamped the entire student loan system with the biggest change involving the replacement of all previous Income Driven Repayment loans with the RAP program. A previous post discusses the RAP program and discusses potential implications for couples considering marriage or already married. The post also promised several case studies examining the financial implications of the new student debt programs for several couples.
This post, the first case study in response to the promise, involves two recent college graduate, identical salaries, one with a modest debt, the other with substantial debt.
Case Study One: Identical Incomes, Unequal Undergraduate Debt, and the Cost of Marriage
Alex and Jordan both earn $49,000 a year. They live in the same city, have the same career prospects, and report identical adjusted gross incomes (AGI). The only difference is their “price of entry” to the middle class.
· Alex holds a modest $10,000 in debt.
· Jordan holds a heavier $40,000 balance.
While single, their paths are clear.
Since Alex owes less than $25,000, the Standard Plan mandates a 10-year repayment. At 5% interest, that’s only $115/month. The cost of the RAP loan would actually be $163 per month (0.04 times $49k divided by 12). Alex chooses the 10-year plan. The RAP plan does not offer relief or the additional liquidity needed by recent college graduates.
Jordan’s conventional choice is a 15-year term, costing $316/month. For Jordan, RAP is a lifesaver. It cuts the monthly bill nearly in half to $163 and includes a government “principal subsidy” that guarantees the balance drops by at least $50 every month, regardless of interest.
As single people, they are winning. Together, they pay $278 per month. Then, they get married.
The moment Alex and Jordan marry and file a joint tax return the RAP algorithm stops seeing two individuals and starts seeing a “household unit.”
Their household AGI hits $98,000. This pushes them into a much higher bracket, where they are required to pay 9% of their total income toward student loans.
Let’s look at three options – (1) both spouses on RAP, (2) Alex stays on conventional Jordan stays on RAP, and (3) both Alex and Jordan go to conventional.
· Both spouses on RAP total bill is $735, and Jordan loses his interest subsidies (free money), new payment is $457 higher than when single.
· Alex stays on the Standard Plan ($115) and only Jordan uses RAP, the outcome is Alex (Standard): $115 Jordan (RAP): $588, Total Household Bill: $703.
· Alex stay on the 10-year standard ($115 per month) Jordan opts for the 15-year standard ($316 per month) bringing the household bill to $431, $153 higher than when they were single.
Filing married filing separately would lower the repayment calculation because income-driven repayment formulas count only the borrower’s individual income when spouses file separately, unless of course the married couple lives in a community property states. However, this strategy is rarely advantageous (even in common law states) when spouses earn identical salaries, because the tax code removes or restricts many credits and deductions for married-filing-separately households, typically raising the couple’s total tax liability.
Empirical analyses of tax filing strategies consistently find that married filing separately mainly benefits couples with large income disparities rather than equal-earning households. Alex and Jordan, the subject of case one, earn identical salaries so there is no need to consider married filing separate option.
Conclusion: The marriage of Alex and Jordan effectively forces the couple off the RAP plan and into conventional loans to avoid the program’s steep household income brackets. By choosing the standard plan, they bypass a potential $735 monthly obligation but still face a $155 “marriage penalty” compared to their combined payments as single individuals.
The application of the RAP payment percentage to the entire household AGI often means the RAP program is not useful for married borrowers. Fortunately, for Alex and Jordan the conventional loans are relatively affordable. This will not always prove to be true for other married households and couples considering marriage.
Authors Notes: More case studies on the impact of the new tax law on student borrowers will follow. The next case study will likely look at households with more debt and a larger dispersion of income. However, I need to do my weekend update so the next case study may not be available until mid-week.
Most personal finance advice assumes a world without taxes, subsidy phaseouts, benefit penalties, or healthcare landmines. The personal finance articles published in this blog look at realistic problems and solutions. Go to the post Personal Finance in the Real World for a roadmap to an alternative view.