I am married and live in California- a community property state.  I presently have $115k in deferred Federal Student Loan debt which I will soon need to begin paying on, via some Department of Education repayment plan- possibly IBR.  My husband has no student loan debt.  We are concerned about the interplay between IBR and the taxes we would pay filing as MFS (resulting in a lower IBR payment, but high total tax bill) versus filing as MFJ (possibly resulting in a higher, but still affordable IBR, and a significantly lower tax bill). In our case, filing as MFS results in an AGI of $54k for each of us, and filing as MFJ results in an AGI of $108k.  My actual income is in fact only $20k. 

The way I read the wording on the Alternative Documentation of Income form OMB No. 1845-0102 (the form the DOE would require me to complete if I file for IBR), if we were to file as MFS- my spouse’s income and documentation would NOT be required (making his income a moot issue); however, using MFJ my spouse’s income and documentation would be required. 

We would take a big tax hit if we file MFS instead of MFJ, so strictly on the tax side of this issue- we would prefer to file MFJ.

Again, trying to understand the wording on this form maybe it sounds like we can file as MFJ- AND still use alternative documentation of income to establish a different, and in my case lower income of $20k- instead of just using my MFS AGI of $54k or our MFJ of $108k.  The form specifically states in Section 2:  “You believe that your adjusted gross income (AGI), as reported on your most recently filed federal income tax return, does not reasonably reflect your current income (and/or your spouse’s current income, if you are married and file a joint federal income tax return)”.  If I understand this statement correctly- I can file for IBR based on my belief that the AGI on my tax return should not be the basis for determining my IBR payment.  Later, Section 2 goes on to say:  “your loan holder will make this determination based on the information you provide with this form”.  I do, after all, “believe” that neither my MFS AGI of $54k nor our MFJ AGI of $108k “reasonably reflect [my] current income”; and my W2 clearly establishes this fact.  So, we need to understand how the DOE will view this belief so we can determine how to file, and ultimately, how much tax and IBR we will have to pay.  At the end of Section 2 the form states:  “The amount of your monthly payment under the IBR plan is based on your current income (and your spouse’s current income, if you are married and file a joint federal income tax return)…”.  How does the DOE interpret this statement in light of the form’s earlier statement about my belief?  This final Section 2 statement seems contradictory to my interpretation of the form’s statement about how I “believe” - as I’ve outlined above.  I have tried asking this question of Sallie Mae several times, but as soon as I mention the word AGI, the operators say they cannot advise me about anything to do with our AGI- when in fact, I am only asking about if and how we can establish our belief that my AGI, however it is figured, does not reasonably reflect my actual current income and that my W2 should, on the basis of my what I “believe” , determine my income. 

Am I grasping at straws here?  Would the DOE have a favorable attitude toward my belief that I have a low, $20k income (thereby giving me an IBR payment of little to nothing) if we file as MFJ, and then use form OMB No. 1845-0102 along with my W2 to document my low income- in spite of having to document our much larger joint income?  Or would they see my belief as specious, consider that our AGI is actually $108k as shown if we file MFJ, and deny my petition to base my IBR payment solely on my $20k income per my W2?

Oh boy, I can answer this one.

I also live in a community property state, but your question didn’t even get to the community property part of the question…

First: no, you can’t have it both ways. You can’t file as MFJ and still have only your income count for IBR.  If you do MFJ then you have to provide income
verification for *both* incomes, either by tax returns or alternative documentation.  This is what the part about “your current income (and/or your spouse’s current income, if you are married **and file a joint federal income tax return**” means.

Basically, you have to calculate whether the increased taxes from MFS is less than the benefit you get from doing IBR on only your income. 

However, in community property states you pretty much have to do alternative documentation as you income verification, even if you do MFS… because your MFS tax return will show your income as one-half of the sum of your and your spouses income, due to the community property laws.

Thank you for your reply Sam!
Have you personally had experience yourself or for others- filing MFS, and then using Alternative Documentation to establish the income you want your IBR calculation to be based-on, as actually less than the 50percent represented by your MFS 50/50 AGI?  And if so, what was the result?

Sallie Mae is my lender- and I have yet to get a concise, straight answer to this question: “If I file as MFS and want to use Alternative Documentation, exactly which form(s) and what process do I use to do this, and do I even need to provide my tax return since I am filing with Alternative Documentation?”  and finally, is a W2 considered adequate documentation of my lower income? or do I need to back this up with something else???

This is exactly what I went through personally with my wife’s loans in IBR.

Standard disclaimers apply: this is just internet advice, and I’m not your lawyer or CPA.

But yes, I went through the whole calculation… but ended up doing MFJ instead of MFS because the amount I’d lose in taxes was greater than the savings on the student loan side.

“If I file as MFS and want to use Alternative Documentation, exactly which form(s) and what process do I use to do this, and do I even need to provide my tax return since I am filing with Alternative Documentation?”

All you need is form OMB No. 1845-0102, which you’ve got.  Check box “1a” since you’ve never been in IBR before.  If you file MFS then skip “Section 3: Spousal information”.  Check “yes” under item 9, then proceed to “Section 5”... item 10 “yes”, then skip 11 if MFS.

The specifics of how you prove Alternative Documentation vary somewhat by servicer.  I’m not sure from your description if you have FFELP loans with Sallie Mae as the actual lender, or maybe Sallie Mae is just the servicer for your Direct Loans.  If FFELP, then I would encourage you to consolidate with Direct… for consistancy’s sake with regards to these things.  Regardless, you *should* not have to provide your tax returns if you are doing Alternative Documentation, you should merely have to provide one other means of proving your income: pay stubs, W2, etc.  However, these requirements vary by servicer.  My Direct Loan servicer, “Aspire Resources” requires two paystubs if using paystubs, for example. 

There’s just really no way to tell in advance. 

But regardless, you still have to calculate your 2012 taxes MFJ vs. MFS.  Turbotax online and H&R Block online can both do this.  Then you can balance the amount of extra taxes paid when filing MFS vs. the amount of savings via the reduced monthly payment in IBR. 

Sallie Mae is the Servicer on all my loans.

I have now figured the taxes both ways.  In our case MFS is very slightly to our advantage on the tax side of this equation; but I’m not sure why it matters if I’m going to base my argument on Alternative Documentation and just leave our taxes out of the equation?  I suppose that if they do not accept my Alt Doc income argument, and insist that I use our taxes- we should file MFS so at least they are not looking at our combined AGI.

Were you successful with your wife’s Alt Doc argument- did you get a lower IBR than would have been the case using your tax return?  Did they ask to see your tax return at all?

Thanks for the insight into your personal experience using OMB No 1845-0102!

“I’m not sure why it matters if I’m going to base my argument on Alternative Documentation and just leave our taxes out of the equation? “

Because you have to do MFS in order that only your income counts, and not your spouses income too, *regardless* of whether the income is proven by the tax returns or through alternative documentation.  If you do MFJ, then the spouses’ income always counts, regardless of the method of documenting that income.

“Were you successful with your wife’s Alt Doc argument- did you get a lower IBR than would have been the case using your tax return?  Did they ask to see your tax return at all?”

Yes, I was successful.  I used a letter from my wife’s employer.  No, they didn’t need the tax return at all.  However, I suspect this is within the discretion of the servicer, so results may vary.

Congratulations on your success!

OK- so MFS is slightly more favorable for us tax-wise and hopefully they will accept my Alt Doc income. A Win-Win for us.

Sounds like you consolidated so maybe you don’t have the experience to provide insight into this question… 

If I don’t consolidate, would I have to make this argument and complete the paperwork individually- for each of my 10 different SL’s; and risk an unfavorable interpretation for some, plus 10 times the paperwork and opportunity for mess-ups by Sallie Mae? 

Just thinking out loud- I wonder if Sallie Mae would see things differently if they discovered that my husband’s actual income is so much higher than my income?  As I mentioned in my first post our actual AGI’s are $20k & $88k with me on the lower side.  I wonder if Sallie Mae might request our returns (in spite of using OMB No. 1845-0102), figure out that my husband is actually earning quite a bit by studying both MFS returns, and then get greedy and deny my Alt Doc argument for a low IBR after on seeing what our combined AGI actually is?  Probably the only way to know is to try. 

The trouble with having to re-apply each year for 25 years (if it were to turn out this way) is that each year we are exposed to the possibility of an unfavorable interpretation, thus wreaking havoc on our budget!

“MFS is slightly more favorable for us **tax-wise**”

Hmm, just to double check: MFS almost *always* results in higher tax payments, but the benefit is in the difference in IBR payments.  I would be extremely surprised if MFS resulted in less *taxes* than MFJ.

“would I have to make this argument and complete the paperwork individually- for each of my 10 different SL”

I don’t know exactly, but I would think it would be once per servicer.  If they are all with Sallie Mae, then you should only have to do this once (per year).

“I wonder if Sallie Mae would see things differently if they discovered that my husband’s actual income is so much higher than my income?”

No, they only care about the spouses income if you do MFJ.

” I wonder if Sallie Mae might request our returns (in spite of using OMB No. 1845-0102), figure out that my husband is actually earning quite a bit by studying both MFS returns, and then get greedy and deny my Alt Doc argument for a low IBR after on seeing what our combined AGI actually is?”

No, none of this can happen… as long as you do MFS.  If you do MFS then you don’t have any “combined AGI”, you have one AGI and your spouse has another AGI.  The only reason you have to do alternative documentation after filing MFS is that you live in a community property state.  Namely, because you live in a community property state, your AGI even with MFS will be $50k [($20k + $80k)/2]... the alternative documentation then shows that you only actually made $20k, not $50k.

I understand your pause.  In our particular case- we don’t have any of the tax items that would make MFJ significantly more favorable than MFS (and as mentioned, MFS is actually slightly in our favor).

Whew- I think we just might get lucky here.  Let’s hope Sallie Mae sees it the way they should (and I say “should” based on the DOE document of 11/1/2012).

This document states:
“Discussion: As described in the response to the previous comment on married borrowers, the treatment of income of married borrowers when determining IBR eligibility is specified in the HEA. The Department acknowledges, however, that application of these requirements to married borrowers who reside in community property states and who file separately from their spouse results in a different outcome than for similarly situated married borrowers residing in other states.”
“As an example, a married couple resides in a community property state and has no dependents. The borrower earns $40,000 and the spouse earns $60,000. They filed their income tax returns separately and have no pre-tax deductions from pay, no other income, and no adjustments to income when filing their Federal income tax returns. Only the borrower has IBR-eligible Federal student loans, which total $50,000. Each spouse would be considered to have an AGI of $50,000. The borrower is eligible for the IBR plan, with a calculated monthly payment amount of $341.31. If the same couple did not reside in a community property state and filed separately, the borrower would have an AGI of $40,000 and the spouse an AGI of $60,000. Because the borrower’s AGI would only be $40,000, the borrower would be eligible for the IBR plan, but would have a lower IBR scheduled monthly payment amount of $216.31.”

[ Note: This is almost exactly our situation- just change the income figures from $40k and $60k to $20k and 85k.]

“The Department understands that married borrowers who file their Federal income tax returns separately from their spouses and who reside in community property states may be disadvantaged when determining IBR eligibility when compared to similarly situated married borrowers in non-community property states. However, §§ 682.215(e)(1)(B) and 685.221(e)(1)(i)(B) and § 685.209(a)(5)(i)(B) authorize the use of alternative documentation of a borrower’s income if the Secretary or the FFEL loan holder believes the borrower’s reported AGI does not reasonably reflect the borrower’s current income. Because the Department believes that it is inequitable to treat married borrowers who file their Federal income tax returns separately differently based on where they reside, we encourage FFEL loan holders to use alternative documentation of the borrower’s income under these circumstances. The Department will take the same approach with the loans it holds.”

Yes, exactly,

You can write them a cover letter when you submit the “OMB No 1845-0102” form, citing those exact statements.

Indeed I will.  In fact, our CFP suggested the letter be written by an attorney- just to emphasize the point that we are serious and know our rights.

Thank you very much for engaging in this dialog, Sam!  If this works out the way it seems like it will, we will easily be able to overcome what initially appeared to be a very serious situation- for now and long into the future.

Just for those looking over these posts-
One additional bit of background I did not mention in my original post because I did not want to muddy the waters- I am 57 and my husband is 63.  He will be retiring in a few years so his income will drop, and I may never be fully employed.  I returned to school during the Great Recession to get a Masters in Family Therapy.  To get a license in California, I need 3000 clinical internship hours (for an MFT, this internship is not considered a valid reason to defer SL payments).  It takes about one year of work to earn 1000 creditable hours- which is all I have presently.  I was laid off from the intern position where I earned these hours in September of 2012.  I’ve applied for many, even unpaid, positions since- but am only one of hundreds in our county looking for a very limited number of intern slots.  I’m thinking that by the time I get the hours, pass the MFT license exam, and find an entry level position I will be closing-in on the age where I probably won’t want to work full time.

So- if we can stay in IBR with little or no payment for 25 years… well, you see what I mean.  Even if the tax man comes knocking, I might not even be able to hear him by that time. 

Our only remaining concern is that IBR will go away, or the rules will change and those already in IBR will NOT be grandfathered-in.

I am aware that roughly 15 percent of the present 1 Trillion in total student loan debt is held by folks over 50.  This could become another massive scandal in the next 10 years- I can just see the headlines now:  “Grandma homeless after IRS seizes assets to cover delinquent Student Loan Debt!”

Oh wow, I would not have guessed that.

In that case, don’t forget that Social Security still counts (to the extent it is taxable) for the IBR calculations.

http://www.fastweb.com/financial-aid/articles/3355-people-retiring-with-student-loans-may-save-money-with-income-based-repayment

“our CFP suggested the letter be written by an attorney”

I probably wouldn’t bother with this.  I haven’t ever seen anything indicating that any servicer does it wrong on purpose, but that they occasionally make simple mistakes.  And I’m a lawyer myself.

Good luck!

Just a Post Scrip to this Thread:
I applied to Sallie Mae for IBR as MFS (my 2012 Fed Return) using my most recent CA UI Payment Stub as proof of my current (Alternative Documentation) income.  They did want a copy of my signed 2012 MFS return (but not my husband’s).  I also wrote a letter basically stating that based on the 11/1/12 DOE document- I believe I am eligible for IBR with little or no payment for one year.  My IBR was quickly granted with a $0 payment!